From 6 April 2010, those earning in excess of £150,000 will be subject to a super tax of 50% on income over that threshold.

Further, personal allowances will be restricted for those earning more than £100,000 at the rate of £1 for every £2 of income above that figure.  As the current personal allowance is £6,475, this means the full allowance will be extinguished at an income level of £112,950.  The gradual tapering of this allowance means that where income falls between £100,000 and £112,950, the effective rate of income tax is 60%.

It may therefore be sensible to review the split of income producing assets between couples, and by looking at ways in which to convert income into capital, which is currently only subject to a top rate of tax of 18%.

National insurance contributions are due to rise from 6 April 2011 by a full 1% being added to the current rate, which is a significant uplift.

Also from 6 April 2011, the higher rate tax relief for pension contributions will be restricted.  The anti forestalling legislation for pension contributions already applies to contributions paid in 2009/10 and 2010/11 to those individuals who have relevant incomes of £130,000/£150,000 or more.  These anti forestalling measures are designed to prevent people taking advantage of the higher rate relief in the interim period before 6 April 2011.  Where individuals have income around this level and are making pension contributions, they will need to look carefully at how the anti forestalling rules and new restrictions apply to ensure they do not fall foul of the rules. 

Individuals

With income tax rates set to rise from 6 April 2010, it is still possible to plan for the last few months of 2009/10:

1.                   Married couples and civil partners should seek to maximise their personal allowances and lower rate bands by reviewing the ownership of income producing assets such as bank accounts, shareholdings and rental properties.  This also applies for the capital gains tax annual exemption, which is £10,100 for 2009/10.

2.                   Where one member of a couple is a basic rate taxpayer and the other is a higher rate taxpayer, payments made to charity under the Gift Aid Scheme should always be made by the higher rate taxpayer as they are currently able to claim higher rate tax relief for the payments.

3.                   Each individual has their own annual individual savings account (ISA) allowance (£7,200 for 2009/10).  Unused allowances cannot be carried forward to a future tax year and should therefore be utilised by 5 April 2010 where this forms part of the individual’s investment strategy.

The individual annual allowance will increase to £10,200 from 2010/11 and is already at this level for those born on or after 5 April 1960.

4.                   It is possible to make contributions to a personal pension plan and contribute up to £3,600 a year without having an evidence of earnings.  This could therefore be a valuable planning opportunity for a nonworking spouse, children or those with only unearned income.

5.                   Payment of an appropriate Gift Aid donation either in the present tax year or in the following year will be a particularly tax efficient means of ensuring that increases in income to £150,000 or £130,000 (for pension anti forestalling purposes) are brought back to below that level thus obviating the need for a special allowance annual charge.

6.                   Tax favoured investments such as the Venture Capital Trust (VCT) or an Enterprise Investment Scheme (EIS) can be useful tax planning tools where they are appropriate for the investments strategy of the individual. 

7.                   Where married couples are in business together, it may be sensible for partnership profits or dividends to be shared as evenly as appropriate.

8.                   Consider changing your accounting year end i.e. from a 30 April to 31 March year end to bring more of your profits into the 40% rate as opposed to the 50%.  Please note that this will also accelerate the cash flow timing in tax liabilities and so one size will not fit all here.

9.                   Partners in partnerships should consider withdrawing capital and reinvesting it as a loan to give tax relief.  Careful structuring is required to meet the legislative requirements, but after 5 April 2010 the loan could give tax relief at 50%.

10.               A corporate partner could be introduced into the partnership, which would receive a profit share taxable at only 21%, and then be retained in the company and taken either as a dividend or as a capital distribution at some later date.

11.               Owner managed business shareholders could opt to pay dividends before 6 April 2010 to take advantage of the current, lower tax rates.  If the company requires working capital, these dividends could then be re-lent to the company, with the company paying interest to the shareholder.

12.               With a private trading company, a shareholder who sells his shares back to the company may be able to enjoy either CGT or income tax treatment for his disposal proceeds.  Given the disparity between CGT and income tax rates, the former will be preferred in virtually every case and so careful planning will be required here.

13.               The same planning point holds good for companies which are about to go into liquidation.  A pre-liquidation distribution is always subject to income tax, whereas any distribution made after the winding up process has commenced will be subject to capital gains tax.

14.               Where an original subscriber of shares in an unquoted trading company disposes of his shares at a loss, it is possible to make a claim under Section 132 ITA 2007 to set the resulting loss against his total income for the year of the loss and/or the previous year.  It may therefore be sensible to delay making such a claim until 2010/11 and obtain relief at 50%.

For Employees

1.                   Consider bringing forward payment dates for bonuses and dividends to before 6 April 2010.  This has a downside of bringing forward payment dates for PAYE and NIC. 

2.                   Consider paying say three years’ worth of salary and bonus this year to top employees who then loan the money back to their employers in return for a pre-arranged rate of interest over the three year period.  This may have implications for contract employment terms, the national minimum wage and will also bring forward PAYE and NIC payment dates.

3.                   Or consider paying salaries in the form of interest free loans which may then be written off if the top rate of tax returns to 40%.

In all three cases, the timing of the corporation or business income tax relief should be considered along with contracts of employment terms, national minimum wage risks and the ultimate risk of an employee not being around at some later date to which the pay actually relates.

4.                   Using tax efficient share schemes to issue shares to employees which will later pay dividends subject to a lower rate of income tax, or may be disposed of at only 18% CGT.

5.                   Providing tax free benefits such as a company bicycle; car parking at or near the workplace; free or subsidised works buses; employer supported child care; life cover or permanent health insurance; provision of a mobile phone; private health insurance or medical check ups.

6.                   Salary sacrifice schemes can provide a useful way to reduce employer’s national insurance costs.  They involve the employee agreeing to forego a part of their salary in return for receiving one or more additional non cash benefits from the employer and will become even more attractive as national insurance rates increase.

Trusts

The introduction of the 50% income tax rate for relevant property trusts (discretionary trusts) from 2010/11 will result in more trust beneficiaries needing to file repayment claim forms.

Discretionary trusts will be subject to a 50% tax rate, or 42.5% on dividend income where income exceeds £1,000 per annum. Very few beneficiaries will be within the 50% marginal income tax band and will therefore need to apply for tax refunds, which may be repaid even before the Trustees have had to file a tax return and pay the tax over to HMRC for the year.

It may be sensible to review the structuring of trusts to either make them settlor interested or to convert them into an interest in possession trust, although you will need to think about the broader implications of whether the trust restructuring is the right move.

Other possible strategies would be to consider trust investment strategies to see if income liable at the higher rates could be converted to capital gains at 18%; and to making regular income distributions from 6 April 2010 to appropriate beneficiaries.

Posted on 24 Feb 2010