From 6 April 2010 those subject to UK tax and earning incomes over £150,000 will suffer 50% marginal rate of income tax. There are tax breaks available to mitigate the tax bill but these can be risky.
Saving on Tax by Converting Income to Capital Gains
Converting income into capital gains is one of the popular tax saving strategies. Because capital gains tax is levied at a flat rate of 18%, converting income assets to those that are subject to CGT seems an attractive option. Two examples are holding a currency account (where a tax-free gain may be possible on conversion) or investment property.
But currencies are volatile so holding a currency account purely for the purposes of a tax saving is not a good idea. As for investment property, especially in times of declining property prices, any potential tax savings must be weighed against the risk of losing the original capital.
Offshore Bonds as Tax Saving Investments
Income tax is only paid on these when the bond is cashed in. So, shifting from a higher rate to lower rate (e.g. on retirement) by the time the bond is cashed in will be beneficial in tax saving terms. However, these investment bonds attract high advisory fees and the choice of underlying investment can be limited (so many may perform badly). Besides, especially if retirement is some way off, it is not possible to predict the exact rate of tax when the bond is cashed in. And the tax rules may change in future.