From April 2010, the top rate of income tax will be 50 per cent for individuals with an income over £150,000. Restrictions will also apply to personal allowances where income exceeds £100,000. The point at which the personal allowance is fully reduced will depend on the level of the personal allowance for 2010/11 but is around £112,950 at current levels.
So what advice and options are available for higher rate tax payers?
- Profit extraction by way of dividends:
- Accelerating the payment of dividends by 5 April 2010 can achieve a significant tax saving.
- Extracting profits early by dividends is something that shareholders of UK companies should consider now to avoid the new higher rates of income.
- Incorporating your business:
- If you are making substantial profits and are thinking about retiring or selling soon from being a sole trader or in a partnership, then you could save tax by incorporating your business into a company. Tax savings can be achieved by incorporating the business and benefiting from lower rates of tax under the corporation tax and capital gains tax (CGT) regimes. There is always the risk though that tax rates may change.
- Reward employees through a share scheme:
- Share schemes offer a tax-efficient way of remunerating employees, with tax advantages for the employees and the company. Share schemes can be used to replace existing cash rewards, such as annual bonuses, reducing the cash drain on companies at a time when money is tight.
- Salary sacrifice schemes:
- Tax savings can be achieved by employees receiving a non-cash benefit in exchange for part of their salary, typically an employer pension contribution. This results in lower tax and National Insurance Contributions (NIC) for the employee and lower NIC for the employer as there is no income tax or NIC to pay on the sacrificed amount.
- Remember tax rates and timings may change.
Don’t delay any tax planning. Please talk to us soon if you think you may be affected by some of these changes.