Date: 22 May 2009
Last month’s Budget announcements included the much-discussed increase in the rate of income tax to 50% for those with income of £150k or more (from April 2010). Coupled with increases to the rate of National Insurance, a reduction in the basis personal allowance and the freezing of the annual pension allowance, proposed in last autumn’s Pre-Budget Report, this rate rise will represent a significant additional tax cost for many individuals.
From April 2010
Income tax:
The basic personal allowance will be reduced to:
- One half for those with income between £100k and £140k
- Zero for those with income over £140k
- A new 50% income tax rate will be introduced for income (other than dividends) over £150k
- A 42.5% tax rate for dividends will be introduced for income over £150k
- There will be an increase in the trust rate to 50%, regardless of income levels
From April 2011
National Insurance:
- Class 1 employee rate will increase by 0.5% to 11.5%
- Class 1 employer rate will increase by 0.5% to 13.3%. The increase will also apply to Class 1A and 1B
- Class 4 rate for the self-employed will increase by 0.5% to 8.5%
Pensions:
- Higher rate tax relief on pension contributions for those with income over £150,000 will be restricted from 6 April 2011. Relief will be tapered away so that, for those earning over £180,000, relief will be at 20%. (See also: A blow for pensions tax relief)
- The annual allowance (the amount of pension contributions an individual can claim tax relief on each year) will be frozen from 6 April 2011 until 2016 at £255,000, making it less tax efficient for some individuals to top up pension funds which have decreased in value, in line with the market.
What can be done?
The widening gap between Income Tax rates and the Capital Gains Tax (CGT) rate of 18% (together with the relatively generous CGT annual exemption of £10,100) means that capital generating, rather than income generating investment products may be more attractive. Offshore insurance wrappers can also provide a tax-efficient way of holding investments, which can provide an income tax-free draw down each year. Alternatively, holding investments through companies may have attractions.
We would advise clients to assess their personal situations and see whether there would be benefits to them in accelerating income into the 2009/10 tax year or deferring opportunities which provide tax relief until a later tax year. Options available include:
- Directors voting to pay dividends early (subject to available distributable reserves)
- Bringing discretionary trust distributions forward (subject to the available tax pool)
- Looking at income received by husband and wives/civil partners and their individual tax rates and the possibility of transferring income sources between spouses
- Changing the pension input period to allow two pension contributions to be taken into account in one tax year
- Closing annual interest accounts prior to the tax year end to accelerate the income tax charge, and re-investing the capital in more tax efficient vehicles
- For self employed individuals, it may be appropriate to change the year end date to bring the income tax and national insurance charges forward
- Reviewing existing trust arrangements, given the 50% income tax rate for trusts: family limited partnerships may provide a tax-efficient alternative
Businesses subject to income tax may wish to consider:
- Deferring tax deductible expenditure until 2010/11
- Not claiming capital allowances on eligible capital expenditure
Businesses subject to corporation tax may wish to consider:
- Implementing a new tax-efficient share incentives plan, or revisiting an existing one, to reduce employment costs
- Retaining profits within the business, rather than distributing them, as the marginal cost of extracting profits has increased by 40% to 50%
There are, of course, a number of issues to be considered and addressed with all of these planning opportunities.
For further details and to discuss what might be suitable for you, please email our Tax Partner Anne- Maree Dunn, alternatively please call her on 01727 838 255.