Income-tax rates will hopefully eventually drop back from their new top rates. Meanwhile, there’s a way to “ride out the higher-rate storm”, says Tax Tips & Advice: an Investment Bond (IB).
Generally, IBs take the form of a lump sum single payment, which a life assurance company will invest in a fund of your choice. They are similar to unit trusts, but unique in the way that they are taxed. No tax is payable until you draw income from the bond or cash it in, fully or partly. You can also draw 5% of your investment tax-free each year, up to a maximum of 20 years. Finally, the profit the bond makes will only be taxed when you surrender some, or all, of it.
So, say Rob invests £60,000 in an IB in April 2010. He immediately starts to draw £250 a month tax-free. The government decides to drop tax rates back to 40% in 2016/2017, so in April 2016 Rob sur-renders the bond for £60,500. He has to pay tax on an £18,500 profit (72 instalments of £250, plus the £500). But rather than paying 50% tax, he will only pay 40%, saving himself around £1,800 and “leapfrogging” the higher-rate tax.