I will start this article with a little quiz.
Name the country that exports more oil each day than Saudi Arabia, and its citizens pay a flat rate of 13% Income Tax?
Which country, often regarded as third world, is expected to have a gross domestic product more than six times greater than the UK in 40 years?
Which country’s currency has strengthened by 30% against the pound in the last 18 months, has become one of China’s main trading partners and is expected to have a GDP the size of the UK’s in the next 20 years?
Take a bow if you answered Russia, India and Brazil respectively to these questions.
The reason I mention this is that I believe there is a great deal of ignorance of how the rest of the World is performing.
Leading UK companies are increasingly dependent on overseas earnings, and this is a trend that shows no sign of ending, however, is it not ironic that what was once a staunchly communist country like Russia is levying an income tax rate nearly one - quarter of the rate that will be applied to the highest earners in the UK from April?
It is no wonder that capital is flowing into countries such as these which, including China, are averaging annual growth of 8%.
What is the UK’s answer to the problems we find ourselves in?
Increasing taxes and issuing more debt seems to be the main solution at present, but history has shown that tax rises do not increase the amount collected as people go out of their way to avoid them.
In fact, the latest projection from the UK Government indicates that the increase in tax to 50% is not going to produce anything like the tax revenue originally expected. I don’t know how much they spent on getting that piece of research but I could have told them that for nothing.
First, it makes sense to have no more than necessary in bank accounts.
Not only are interest rates very poor, but it is also difficult to avoid tax on interest earned, and there is every likelihood that they will fail to keep pace with inflation.
The annual capital gains tax exemption of £10,100 is much underused, and it is wise to try and have investments in place that can enable this allowance to be used if possible.
The fact that the annual Isa (individual savings account) allowance is increasing to £10,200 for everyone, not only those over 50, means that a married couple could shelter £20,400 each tax year between them by using this valuable allowance.
It used to be that pension contributions were a good way to reduce your tax bill, but with the recent legislation restricting higher-rate tax relief, it is becoming more and more likely that higher-rate tax relief may be withdrawn altogether in the near future. As a result, I would suggest that any higher-rate taxpayer who is not caught by the high-earner rules (by not having earned more than £150,000 in any of the past three years) should put as much into their pensions as they can afford this year, as it may not be possible to get 40% tax relief in the future.
Other strategies include using offshore bonds where the underlying funds are free of UK tax and it is possible to control when, or if, any tax would be due on remitting the funds back to the UK.
For those with large share portfolios it may be worth realising part of these in the current tax year when any gains will be taxed at 18% and reinvesting the proceeds into a contract such as an offshore bond, which gives greater control over when tax would be due.
Finally, with regard to where you should invest your money, does it not make sense to look at the world as a whole rather than keep the vast bulk in the UK, a country of 60 million, heavily taxed, citizens? For those with stockbroker portfolios that tend to have a bias towards the UK, perhaps this is a question worth asking.
Article courtesy of The Press and Journal
Tuesday 2 March 2010
