The introduction of a 50% tax rate for taxpayers with income in excess of £150,000 and the withdrawal of the personal allowance for those with income exceeding £100,000 is a significant change to the income tax regime.
At the same time, tax relief for pension contributions made by high earners is also in the process of being reduced. Not surprisingly, this cocktail of what are effectively income tax increases has created a large demand for tax-planning solutions among those clients affected.
Changes from 6 April
- The personal allowance was withdrawn for individuals whose income exceeds £100,000 a year
- A 50% income tax rate was introducted on all income above £150,000 a year.
Income above £100,000
The personal tax allowance (currently £6,475) will be tapered away at a rate of £1 for every £2 of income over the threshold for those with income of more than £100,000, and disappears completely on income of £113,000 and above. This effectively means that the rate of income tax between £100,000 and £113,000 is 60%. Many will consider this to be unacceptable and will be looking for ways to reduce it:
- Pension contributions either made personally or by salary sacrifice. Note anti forestalling rules for pension contributions are introduced from 6 April 2011 which may limit the contributions.
- Charitable donations
- Transferring savings into their spouse's name
- Making approved investments in order to qualify for 20% income tax relief
Income above £150,000
This income will be taxed at the higher rate of £150,000 and the above strategies will be effective in reducing levels of taxable income.
The self employed are largely restricted to the tax-planning examples above but there are a number of other opportunities, such as the introduction of a partner to the business (perhaps a spouse or business partner) which provide an opportunity of sharing the profits.
Alternatively, incorporating the business into limited company status may be considered, providing flexibility to consider additional tax planning alternatives available to those trading through a limited company.
Directors/Shareholders of Limited Companies
If your business is already trading through a limited company, you may feel the impact of the changes when you extract income from the company. There are alternative considerations:
- Accruing dividends before the introduction of the increased tax rate
- Maximising pension contributions
- Taking loans from the company
- Spreading dividend income with your spouse whilst this option remains available
- If rent is paid by the company, consider the ownership of the property in order to spread the rental income
Changes such as these are never popular but it is likely that we will continue to see increased levels of taxes in an attempt to restore the economic deficit as a result of the financial crisis. Taking a proactive approach is essential to ensure the sustained growth of your firm.
Chartered Management Accountant
The Accountancy Office Limited, Basepoint Business Centre, Vale Business Park, Evesham, Worcestershire, WR11 1GP
Telephone (01386) 764741
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Member since: 30th June 2011
I am a Chartered Management Accountant and Director at The Accountancy Office Limited who specialise in providing professional and affordable accountancy and tax services to small businesses.