Preparing for a 50% top tax rate

The lowest rate of income tax, 10%, was removed for most individuals in 2008. Nowadays it applies only to a small slice of savings income and to those people on the lowest incomes. For most, the 2009/10 tax rates are 20% and 40%, the latter having been the top rate since 1988.

From April 2010 a new top rate of income tax is being proposed: 50% on income over £150,000 and 42.5% (up from 32.5%) where the top slice of income is dividends.

In addition, from April 2011 those earning more than £150,000 a year will lose higher rate tax relief on their pension contributions. New rules have been introduced to stop those who might hope to use the period before then to increase premiums or contributions to make the most of relief at 40% this year and relief at 50% in 2010/11.

Although the new 50% and 42.5% top tax rates are not effective until 6 April 2010, you may already have earned income which is going to be taxed at those rates - for example:

self-employed profits for accounting periods ending on/after 6 April 2010 (50%)
company profits to be distributed by dividends/bonuses payable after 5 April 2010 (42.5/50%).

HM Revenue & Customs has made it clear that it will challenge artificial schemes to circumvent the 50% rate of tax and, in particular, will pay close attention to employee benefit trusts. Nevertheless, there are limited ways to reduce the impact for those whose taxable income will exceed £150,000 in 2010/11 including:

accelerating income into the 2009/10 tax year by paying dividends/bonuses earlier
a change of accounting date for a self-employed business to shift profits into 2009/10
forms of salary sacrifice where there is a saving to be made by replacing salary with certain benefits-in-kind.

Any of these may mean that income shifts to a lower tax rate, but they may also mean that additional cash must be found, either to withdraw from the business or to pay the tax.

To discuss how you can lessen the impact of tax rate increases, contact your usual Littlejohn tax adviser or email tax@littlejohnllp.com

Year End Strategies 2009/10

Disclaimer:
This guide is prepared as a general guide only. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author or publisher. Always seek professional advice before acting.