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Finding planning opportunities in taxing times

Lisa Cornwell says the UK government’s recent tax hikes present an opportunity to speak with clients

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Since April this year, individuals subject to UK tax with annual income in excess of £150,000 (0.6% of the population according to the Annual Survey of Hours and Earnings), have paid tax at 50% on any income above this amount.

For those with dividend income above £150,000 per annum, the applicable rate is 42.5%. In addition, the personal allowance for those with annual income above £100,000 has been tapered down and disappears completely once earnings hit £112,000. The final sting in the tail is that pension contributions for high earners no longer qualify for relief at the higher rate of tax, limited instead, in many cases, to tax relief at the basic rate.  More change is expected.

The most recent change has been to the Capital Gains Tax rate, which increased from 18% to 28%. Expectations were that the rate would align with income tax rates, such that the announcement, when it came, was greeted with a sigh of relief from many. However, this increase did represent a hike of more than 50% on the existing rate, and is, as a mid-year change, unprecedented.

In a short space of time, the UK has considerably increased the burden of tax on those generating the largest sums of tax revenue. Whether this will increase tax revenues remains to be seen. Based on the so-called ‘Laffer curve’, an increase in tax rates on top earners has usually caused revenues to drop, not to increase. Psychologically, tax at 50% seems to be the rate which galvanises individuals into action – HM Treasury itself estimating that up to 70% of taxpayers will look to take action to minimise their exposure at this rate.

More dramatically, we would appear to have reached a level of tax which triggers individuals into leaving the UK – the Centre for Economic and Business Research estimating that 25,000 entrepreneurs could re-locate away from the UK, removing hundreds of billions of pounds of revenue from our economy. But the real damage inflicted, and which is difficult to quantify, is in those who decide against coming to the UK. Whether a newly qualified economics graduate seeking work with a hedge fund will pick the UK over Singapore, Geneva or the US – only time will tell.

All said and done the landscape is far from bleak from a tax planning perspective. The rule changes and rate increases represent an ideal opportunity to pick up the phone and speak with clients.

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