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Tax Update: Alternative Minimum Tax – What it Would Mean for UK taxpayers?

In an attempt to recoup funds sorely needed after the country was ravaged by coronavirus, the Chancellor is considering new ways to gain potential missing income from the UK’s top earners.

This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice. 

It is a widely held belief that the majority of the tax burden is placed on the lowest earners and that the richest avoid paying their fair share of tax. While that’s not strictly true, the wealthy do have access to help and the ability to plan their finances and taxes to ensure they keep as much of their hard-earned income in their hands rather than the government’s.

Could the Chancellor be considering AMT?

Looking across the pond for a solution, Alternative Minimum Tax (AMT), a concept long-employed in America, is up for consideration. The way it works is anyone with an income above a certain threshold must pay a minimum rate of tax on their income after deducting a flat exemption. If their normally calculated tax bill is lower than the one that is calculated by applying the AMT rates, then the AMT rate is the one that should be used. In this case, there’s little that tax planning can really do.

A joint study from the University of Warwick and the London School of Economics and Political Science was able to examine the possible outcomes of a UK version of AMT.

Research results showed that the average effective rate of tax paid by 1/10th of people with income over £1m was lower than for somebody earning £15,000 — not even due to fancy tax planning or outright evasion, it was down to the way the tax system is designed. According to the research findings, the disparity comes from the much lower tax rates on dividends, capital gains, deductions, and reliefs.

The report proposed a up to £20bn per year could be raised from applying the same tax laws to all income and capital gains as it is currently applied to earnings, with £11bn coming from sources that could easily afford extra taxation. The suggested threshold would be £100,000 so anyone earning more than that pays at least 35% tax rate.

Managing your tax liability today

It’s certainly a creative solution to raising revenue, but in the meantime, the Alternative Minimum Tax proposals serve to remind us of the importance of tax planning and how much money you can save by keeping a close eye on tax rules. Working with your accountant and financial adviser is the most effective way to manage your finances. Schedule a consultation with us today to make the most of the benefits of financial planning today.

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