High earners facing the new 50% tax rate have a range of options to avoid paying the full amount into Government coffers, experts have predicted.
The Institute for Fiscal Studies had already warned the hike would produce far less revenue than the Treasury hoped unless more stringent measures were brought in to crack down on tax avoidance.
Chancellor Alistair Darling has reduced pension contribution relief in a bid to stop big earners shifting more of their salary into their pension fund in order to pay less income tax.
However, this is still a favourable option for the next two years, before the new 20% relief rate is brought into force.
Outlining the possible ways for someone on a high salary to pay less tax, senior tax partner at BDO Stoy Hayward, Stephen Herring, said: “The first basis is to maximise pension contributions in the next two years, and maximise contributions to ISAs noting that the limit goes up to £10,200 in October for the over 50s and for everyone else in April next year.
“Then if you’re of the mindset that you’re willing to take a high level of investment risk, you can look at the Enterprise Investment Scheme and Venture Capital Trusts which provide tax relief.
“Then sit on your hands really and when the 50% rate comes in and the relief is capped, see what products are on offer.”
He predicted that a new raft of tax efficient investment products will be made available for those hoping to avoid a 50% bill.
Michael Wistow, head of tax at law firm Berwin Leighton Paisner, said: “History shows that increasing tax rates rarely achieve the objective of increasing the tax take. Individuals will now look to find other ways of earning money or reducing tax liabilities.”
Investment firm Hargreaves Lansdown said the measures will obviously discourage high earners from investing in their pension.
This is because while 20% tax relief will be given on contributions, the pension payments themselves will be taxed at a much higher rate.
Tom McPhail, head of pensions research, said: “By breaking the link between income tax and pension tax relief, the Government is setting a dangerous precedent for the future.”