Britain's high earners could see taxes rising this year – here's how they can invest wisely, according to financial advisers

• The UK government has spent billions to support businesses and individuals during the coronavirus pandemic.
• Ministers may target tax reliefs and high earners to cover the costs of COVID-19 support.
• High-net worth (HNW) individuals can protect their income. Business Insider spoke to wealth managers and financial advisers to find out more.

Governments around the world have committed billions to support businesses through the coronavirus crisis. At some stage, they may need to recover those funds, and reduce their deficits, through tax rises.

This could be bad news for high earners.

The UK government alone has pledged to guarantee up to £330 billion of loans to support smaller businesses through the pandemic, and will continue to pay a portion of the wages of furloughed staff — those temporarily laid off during the crisis — until October. The UK's Office for Budget Responsibility (OBR), which analyses public finances, estimates the bill for the April 2020 to April 2021 financial year will reach £298 billion.

All eyes are on the November Budget, where chancellor Rishi Sunak will set out the government's plans to recoup some of that spending.

Sarah Coles, personal finance analyst for Hargreaves Lansdown, said it's likely Sunak will tax assets rather than income — which means investments and pensions could come under attack. She warned that the government could scale back reliefs on dividends and pensions for high earners, too.

Calls for a wealth tax to cover the costs of Covid-19 support are growing, and reports suggest Sunak may scale back business property relief, which allows shares in alternative investment market stocks to be passed on without inheritance tax.

So how can high net worth (HNW) individuals avoid a tax grab? Business Insider spoke to wealth planners and financial advisers to find out where the wealthy can shelter their cash.

Individual Savings Accounts (ISAs)

Everyone in the UK gets a £20,000 ($24,611) ISA (Individual Savings Account) allowance. ISAs are individual savings accounts, available to retail investors, that are exempt from tax on its returns.

They can either save the money in a cash ISA or invest it in the stock market, earning returns tax-free.

Coles said there was no guarantee this generous limit will remain post-pandemic, and that investors should act now to avoid future changes. "The allowances usually change at the turn of the tax year but the ISA allowance has changed mid-year before now," she added.

Pensions

Pensions are a tax-efficient way to build your retirement pot. Your contributions are effectively topped up by the government through pension tax relief.

All UK taxpayers get a basic 20% tax relief on pension contributions automatically. Higher rate taxpayers — those with an income between £50,001 and £150,000 — and additional rate taxpayers, who earn more than £150,000, get more relief on their contributions as they pay higher tax rates, of 40% and 45% respectively. They may need to apply for this extra relief, although their employer usually does this automatically.

Think tanks such the Centre for Policy Studies and other industry commentators have suggested scrapping this perk, which could reduce higher earners' pension incomes. However, financial advisers say pensions are still valuable tools and Joshua Gerstler, financial planner for The Orchard Practice, says high earners can use "carry forward" rules to invest unused allowances from the previous three years.

The annual contribution limit for the 2020/2021 tax year is £40,000, and the lifetime cap is £1,073,100. You would need to contribute more than £3,300 a month to get to the £40,000 limit during a year, but a high earner may easily come close to this.

Venture Capital Trusts (VCTs)

HNW individuals often earn more than the combined ISA and pension caps each year.

For those people, Coles said venture capital trusts (VCTs) and enterprise investment schemes (EIS) offer generous tax benefits and support the government's aim to back UK businesses.

A VCT is a listed company run by a fund manager who aims to spot and invest in fast-growing private companies. You get 30% tax relief on investments up to £200,000, and earn dividends and capital gains tax-free.

An EIS is similar, but isn't listed, and provides 30% income tax relief of up to £1m. That allowance doubles if you invest in knowledge-intensive companies that specialise in research, development or innovation.

General investment accounts

Investors can sell assets such as shares outside of an ISA and earn £12,300 from the profits before paying any tax. This is known as the capital gains tax (CGT) allowance.

Marc Maddison, managing director of wealth planning at the Kingswood Group, said general investment accounts are useful within this allowance. Check what an asset is worth now compared with when you purchased it — if the profits are less than £12,300, you don't have to pay any tax.

"These types of accounts combine very well with creating a tax-efficient portfolio for any client alongside funding ISAs," he said.

Investment bonds

Maddison added that tax on investment bonds is deferred on withdrawals worth up to 5%, until the product matures or you cash it in.

Additionally, the income and gains earned from an investment bond are charged at the basic 20% rate, rather than 40 or 45%, making them useful tools for high earners.

Use your tax allowances

It may be worth sharing savings and investments with a spouse so that you can combine your reliefs and tax allowances. This is especially useful if one partner earns less — they would pay lower tax on, for example, cash savings.

A married couple could each use their individual £2,000 dividend allowance earned on shares and combine their CGT allowance by owning assets jointly, effectively doubling the amount they can earn from a stock sale before paying tax.

Shona Lowe, private client and corporate director at Standard Life's financial planning arm 1825, said families are increasingly sharing their assets to "distribute money to where it is needed most during what are for many very financially challenging times."

"There's no crystal ball but the overall train of direction indicates certain tax rates will increase or reliefs will be reduced. That makes it more important than ever to make use of current tax rates and rules," she added.

Spend it

If all else fails, you could follow Prime Minister Boris Johnson's advice to "shop with confidence", and do your bit to get the economy moving. You could finally buy that new car, fund home improvements or purchase other luxuries.

However, whether you spend or save more, Coles says high earners should not panic about potential tax changes. "If there are investment opportunities you have already planned to take advantage of, any changes may encourage you to put your plans into action sooner rather than later," she said.

"However, it's not a sensible idea to transform your plans in a mad dash to shelter cash from any potential attack."