There has been coverage in the media this week about the high profile group of economists that suggested that the 50% tax rate is counter-productive and results in reduced tax collection. This is a debate that is probably most likely argued based upon which side of £150,000 your income falls.
In practice there are things that can be done to reduce income tax for any individual, however in practice it is generally the more affluent that can really use allowances fully.
Pension contributions up to £50,000 would attract tax relief at 40% and perhaps 50% depending on income. In other words a 50% taxpayer is really investing £25,000 to get £50,000 invested. This does of course depend entirely on the figures involved and in theory under the new rules unused allowances from the two previous years could be used as well.
ISAs are not tax reducers immediately, but they grow free of capital gains tax and the bulk of income tax. £10,680 is the current full allowance, per person over 18.
Anyone can gift money and this acts in a similar way to pension payments, in that the charity receive the extra grossed up payment.
For those that are keen to help the UK grow businesses and create jobs, there are Enterprise Investment Schemes, which can provide 30% tax relief on the investment and can also be used to defer capital gains tax. These are higher risk investments than the majority of normal investment funds. An EIS can swallow up to a £500,000 investment from an individual, providing a tax relief of £150,000.
So there are things that can be done to reduce taxable income and use allowances (there are other too). Those least able to take advantage are those in good pension schemes and high incomes, who may get caught out by new rules that would mean paying even more tax – even if they already pay 50% on some of their earnings.
I think it unlikely that the Coalition Government will remove the 50% rate at the moment, preferring to wait until the economy is obviously improving.
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