Welcome to the 100% + club (whether you like it or not)

The 100% + club is an exclusive group of individuals who manage to achieve a tax saving greater than their expenditure or conversely, suffer a tax charge greater than the income they receive!

I’m not talking aggressive tax planning, rather ‘imbalances’ in the tax system.

From a taxpayer’s perspective, here are some examples of the good and the bad.

Example 1: The High Income Child Benefit Charge

Mr X has 4 children from his first marriage and Mrs X has 4 from hers. In addition to bringing up 8 children, Mrs X works part-time earning £10,000 per annum. Mr X works full-time in salaried employment earning £50,000 per annum. In April 2013 he is rewarded for his hard work with a £10,000 pay rise. You would be forgiven for thinking this would be a real boost for the family’s stretched finances. Unfortunately, when the clawback of Child Benefit is added to the tax and national insurance payable on the additional £10,000, the family will actually be worse off in 2013/14 than if he declined the pay rise. Mr X’s marginal rate of tax (including the High Income Child Benefit Charge) is actually 101.3%.

In fact anyone in the £50K to £60K income bracket (including the self-employed and people with investment income) who is caught by the High Income Child Benefit Charge will have a terrible marginal rate of tax in 2013/14 – and the more children you have the worse it will be! On the flip side, a high marginal rate of tax means that any tax breaks that work by reducing the amount of your taxable income will be supremely valuable as the effective rate of tax relief will be huge!

If you want some expert tax advice to help make a real difference to your family’s finances then give me a call – as soon as possible.

Example 2: EIS/Seed EIS

Mr Y pays tax at 50% on his top slice of income. He invests the maximum £100,000 in a Seed EIS investment before 5 April 2013. His investment represents the reinvestment of a capital gain on which he would otherwise pay Capital Gains Tax (CGT) at 28%. Unfortunately the EIS investment fails completely after 3 years. Fortunately, the combination of 50% income tax relief on the Seed EIS investment in 2012/13, 28% relief on the exemption from CGT on the reinvested gain and finally income tax relief available when the investment fails (lets assume his marginal tax rate is then 45%) means that he could end up reducing his tax bill by a cumulative £100,500 – slightly more than the investment actually cost him!

How does the tax system work for you? Do you know your marginal rate of tax? Do you know how to maximise your tax reliefs? If not, give me a call – as soon as possible.