Converting income into capital gains has become the holy grail of tax planning following the government’s plan to increase the top rate of tax to 50%.

Investors who take capital gains, rather than income, can take advantage of the relatively generous 18% tax rate, and the £10,100 tax-free allowance. Income, by contrast, qualifies for an allowance of only £6,475 and a top rate of 50%.

Richard Proctor at Grant Thornton, the accountant, said: “If you are able to put your earnings into a business you can really take advantage of the capital-gains tax (CGT) rate — however, the ordinary man on the street has limited opportunities here.”

Accountants are therefore looking at products that convert income-like returns into capital gains for tax purposes.

However, Adrian Shandley of Premier Wealth, an adviser, warned: “I don’t put it past the government to hammer capital- gains tax in the future, but while it’s there it’s worth taking advantage.”

Accountants say the Revenue is likely to clamp down on artificial structures created to avoid income tax so use existing schemes the Revenue considers legitimate.

We look at how to turn your income into gains.

1 DUMP BONDS

Advisers say now is the time to cash in investment bonds — including much-maligned with-profits bonds — in favour of unit trusts as they are more tax efficient.

Investment bonds, sold by insurers, are taxed at 20% before returns are paid. Higher-rate taxpayers must pay a further 20% when they cash them in. You can, however, withdraw up to 5% a year with no tax to pay until the bond is cashed in.

Experts recommend those earning £150,000 a year or more to abandon investment bonds now to avoid the 50% tax rate in April, although it is important to check for any exit penalties.

2 LOW-YIELD FUNDS