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Tax the Rich

That seems to have been the message of the latest Budget with the new 50 per cent income rate and a number of proposed changes to pension payment relief aimed at individuals with income over £150,000.

In addition anyone earning over £100,000 will see their personal allowances tapered away by £1 for every £2 over £100,000 earned, such that persons recieving income over £112,950 willhave no pesonal allowances at all.

The new 50% income tax rate, the highest of any major economy in the developed worls, will apply for 6 April 2010 as wil the reduction in pesonal allowances meaning that the effective rate of income tax on income between £100,000 and £112,950 will be an eye-watering 60 per cent!

However, how much will the new 50 per cent tax rate actually generate for the Government coffers? Astonishingly, even the Government seems to think that the amount of tax it will raise will be negligible with Treasury figures revealing that they expect 69 per cent of those liable to pay the tax will find some ways of avoiding it.

The Institute for Fiscal Studies went even further and stated that the rises may not result in any increase in tax takings as those individuals affected may decide to leave the country or retire early.

It said that those who stayed in the system would look for ways to reduce their taxable income by working less, contributing to a tax-free pension or converting it into other types of earnings which are taxed at lower rates.

Our own experience since the announcement of the 50 per caent tax rate and the restrictions on pension contribution reliefs certainly bears out the Institute for Fiscal Studies' view as there has been a marked increase in interest from clients at looking at ways of reducing their taxable income below the thresholds that the new measures will apply from.

We have been able to advise them of a number of methods in which income can be sheltered from tax completely or how pension contributions can be made without falling foul of the new rules saving the clients significant amounts of tax immediately and also moving forward.

If you are likely to be affected by the changes in the Budget it's time to think of planning.

The Financial Services Authority does not regulate Taxation advice.

Levels, bases of and reliefs from taxation may be subject to change.