Adam Aiken asks how rises in taxation may impact on your income
13:01 18 March 2011
It has always been sensible for high earners to protect as much of their income as possible from the taxman, but it is now proving to be more important than ever.
Changes to income tax, national insurance and VAT mean that an increasing amount of what we earn and spend is going straight into the treasurys coffers.
The so-called marginal rate of tax refers to the highest rate of income tax we are liable for. So someone earning between 6,475 and 37,400 has a marginal rate of 20%, while someone earning between 37,401 and 150,000 has a marginal rate of 40% and someone earning more than that has a marginal rate of 50%.
But adding the effects of national insurance and VAT to the equation has led experts to calculate that some high earners are set to have an effective marginal rate of nearly 70% thanks to the latest tax changes, while even basic rate taxpayers face giving more than 40% of their income to the Government for every 1 they earn above their tax-free allowance.
Asset management firm Fidelity International has worked out that national insurance and VAT help push the effective marginal rate to 43% for basic rate payers, 51% for people earning more than 37,400, and 60% for those on more than 150,000.
But thats not all. Because the personal allowance is withdrawn for people who earn more than 100,000, Fidelity estimates that anyone earning just over that amount will have an effective marginal rate of 68%. In other words, for every extra 1 these people earn and spend, 68p will be swallowed up in income tax, national insurance and VAT.
Rob Fisher, head of UK personal investments at Fidelity International, said: These figures will prove quite shocking to many of us. The amount we are now paying in taxes is really significant and people must ensure they take advantage of every tax break available to them.
The good news is that it is often possible to plan ahead to avoid these high rates.
If you are a high earner and youve never taken advice or if you havent had any advice in the past few years you would do well to contact an accountant to see if you can reduce your tax liabilities and one of the most effective ways to reduce a marginal rate is via higher pension contributions, which attract tax relief.
Other methods include married couples and people in civil partnerships making sure that income from savings, shares and property goes to the spouse or partner who has the lower marginal rate.
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