Hundreds of thousands ‘will get caught’ in 40p tax net

 

The hundreds of thousands of people who will be sucked into the 40p tax bracket in the coming years will find it impossible to use the range of sophisticated avoidance measures routinely exploited by the wealthy, tax experts have warned.

Toby Ryland a partner at the chartered accountancy Blick Rothenberg said that most of the people who will find themselves liable for the 40p rate from next year as a result of this week's Budget will not have a level of disposable income where tax planning makes financial sense. He said: "At the £150,000 level, people have more disposable income so they can plan their affairs better, whereas at the 40p rate the overwhelming majority of people will get caught and have to accept it."

The Chancellor this week lowered the 40p threshold to £41,450, which will push an additional 325,000 people into the higher rate bracket from April 2013. The Institute for Fiscal Studies forecast this week that five million people could find themselves paying higher rate tax by 2014, up from 3.7 million in 2011.

One of the ways in which some high earners have managed to avoid paying the 50p rate of tax (now set to fall to 45p) has been to transform themselves from company employees into "contractors". This made their remuneration liable for corporation tax at a 20 per cent rate, rather than income tax at 50 per cent. In February, Ed Lester, the chief executive of the Student Loans Company, was found to be using such an arrangement to save £40,000 a year in tax.

But tax experts have said that renegotiating their employment status is unlikely to be an option for earners lower down the income scale. "You're not going to find large swathes of people employed in large companies saying can we look at ways of mitigating the tax bill. It just won't work" said Adam Stronach, of Harwood Hutton. "Our sense is there won't be large numbers of people queuing up to use such schemes. There will be structural factors in the way, such as how they're employed and who they're employed by."

Yet some experts forecast that some of the new higher rate tax payers will seek to ask their employers to convert some of their salary into pension income, which is untaxed. "I wouldn't be surprised if more than a third [of the new 40p taxpayers] did that," said Stephen Herring, senior tax partner at BDO LLP. He also said some people might seek to work fewer hours, rather than trying to avoid the tax. "Some people returning from maternity might be more attracted to three days a week rather than five because their marginal tax rates is 40 per cent and they've got child care, etc," he said.

Another way in which wealthy people have been able to minimise their payments to HMRC is by investing in special funds that attract government tax breaks, such as Venture Capital Trusts and Enterprise Investment Schemes. But tax experts warned these were unlikely to be suitable for the new people pulled into the 40p bracket because of the risks involved.

Come clean on your earnings, Osborne told

George Osborne's claim that he did not earn enough money to benefit from the cut in the 50p tax rate has been challenged by Ed Miliband who urged him to "come clean". The Labour leader said it was important to know if the Chancellor and David Cameron had been beneficiaries of their own measure.

"It's like declaring an interest. If you're one of the few people getting a big tax cut, it's legitimate to say: Come clean," he told The Daily Telegraph. He said he was not accusing them of avoiding tax.

Mr Osborne said this week he was not in the 50p tax band that started at £150,000. Mr Miliband added: "[Maybe] he's got a good accountant."

In numbers: The 40p rate

£41,450 The new, lower income threshold for paying the 40p tax rate, for April 2013

1.3 million The number of people who will have to pay the higher 40p tax rate because of the Chancellor's 2012 Budget

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