Tax planning to the fore as changes approach
Nov 21 2009 by Iain Laing, The Journal
CHANGES to the taxation of high net worth business owners have brought income tax planning firmly back to the top of the agenda.
April 6 next year sees a new top rate of 50% on taxable income over £150,000 together with restricted personal allowances on income over £100,000. The following year will see further cuts in tax relief for pension contributions over and above the restrictions in contributions over £20,000 a year that were introduced earlier this year. National insurance contributions (NIC) will also be increased by 0.5% for everyone.
All this adds up to a combined tax and NIC rate of 51.5% and an effective marginal rate of up to 61.5% taking into account the reduction in allowances. This will hit hard on the pockets of those with taxable income over £100,000.
So what can be done to mitigate these changes for those likely to be affected? Firstly, find out if income can be accelerated into the current tax year so it is taxed at 40%. Consider taking dividends before the effective rate paid on the cash received goes up from 25% to 36%. If necessary the net dividend can always be lent back to conserve cash in the business.
Think about paying bonuses before change in tax rates – subject to cash flows and any other factors.
Consider closing bank accounts before April 6 so the interest arises at that date and not the annual payment date.
You will pay your tax earlier but at 40%. The same principle applies to the acceleration of offshore income gains. Providing that the relevant disposal takes place before the deadline, the gain will be treated as income arising in this tax year.
Alternatively, look into the timing of business expenses, capital expenditure and gift aid donations so they attract relief at 50% instead of 40%.
Where unincorporated businesses have an accounting date early in the tax year, it may be possible to move it forward to bring more profits into the current year, which would be beneficial for tax and commercial purposes – albeit at the cost of accelerating tax payments.
Equalisation of assets between spouses has long been basic tax planning in the right circumstances and might see a revival.
This will maximise the net-of-tax income received by a couple and there are usually no tax implications on the transfers of any assets so long as both parties are UK-domiciled.
Investment products such as life bonds can also provide an opportunity for individuals to enjoy tax deferred roll-up of income and gains whilst being able to withdraw 5% of their initial contribution per annum tax free.
Any gain on redemption is subject to income tax but might be an attractive option for anyone not expecting to pay higher rate tax at that time.
Although income tax is going up, capital gains tax remains at 18%. In the right circumstances, it is possible for company owners to take cash from their business in a way that attracts the 18% rate: the same principle applies with certain types of share based incentives that can form part of an employee's remuneration package.
These can assist in the retention of employees and executives in a business.
Independent financial advice should always be taken before making any investment decisions.
Investment products such as life bonds can also provide an opportunity for individuals to enjoy tax deferred roll-up of income
