The High Earner

The Client

Phillip is a successful professional, working in the City of London. He is in his early 50s and married to Jennifer, who is a housewife and non-taxpayer. They live in Surrey with their 2 children.
He was paid a salary of £375,000 per annum and had accumulated around £3.5m in personal assets, including just under £1.8m in his pension. He was not looking to retire for another 3 years.
Phillip was very concerned by the amount of income tax he would have to pay, particularly in light of the impending increases to the top rate of income tax and the restrictions due to be imposed on pensions tax relief.
He was wondering whether he could reduce his tax liability and whether he should continue to make his regular pension contributions or not.

Although it was possible to continue making pension contributions, we needed to assess whether this approach would actually be financially advantageous.
To minimise the amount of higher and top rate income tax Phillip would have to pay on his income.

We encouraged Phillip to avoid making further pension contributions, as he would have only been able to claim basic rate relief at 20%, rather than the 40% he was currently enjoying. His eventual retirement income would also subsequently have been taxed at 40%, so he would have generally received a poor deal from making further contributions.
Furthermore, the proposed additional contributions, which would have totalled around £300,000 over the years before he planned to retire, would have taken the value of his pension fund above the 'Lifetime Allowance' of £1.8m, which would have seen these excess funds liable to a tax charge of 55%.
We arranged for the transfer of certain assets and accounts into Jennifer's name, to utilise her unused Personal Allowance and basic rate income tax band, thus avoiding a sizeable part of the family's income being taxed at the 50% top rate of tax.
We asked Phillip to complete a psychometric risk-profiling questionnaire and after in-depth discussions, he confirmed he was prepared to take a certain level of risk with his investments, particularly if it meant saving tax.
Therefore, we established a 'Venture Capital Trust' investment in both the 2009/10 and 2010/11 tax years, which would deliver a 30% income tax saving on a £400,000 investment and would provide tax-free dividends and capital growth.

Phillip avoided putting his money to a relatively inefficient use and saved around £165,000 in tax charges by not exceeding the pensions Lifetime Allowance.
The family saved around £15,000 in income tax by utilising Jennifer's tax-free Personal Allowance and basic rate income tax band.
Phillip recouped £120,000 of income tax via his VCT investments and began receiving tax-free dividends totalling around £12,000 per annum.