Act now to beat the 50% tax rate

Current rumours suggest that Budget Day will be on Wednesday 24 March, swiftly followed by the General Election on Thursday 6 May.

The 2009 Budget and the Pre-Budget Report have already heralded major tax increases. Whatever shade of government we have following the election, there will be no room for tax giveaways, so burying your head in the sand and hoping for a reversal of the measures already announced is not a realistic option. Click here for more details.

The major attacks are on so called ‘high earners’ – from
6 April 2010:

• personal allowances will be withdrawn at the rate of £1 for every £2 of taxable income over £100,000. Those affected face a marginal tax rate of 60% on income between £100,000 and £112,950;
• qnyone with taxable income in excess of £150,000 will pay 50% income tax on their top slice of income.

Added to these measures, which have yet to bite, are the confusing and mind-boggling ‘anti-forestalling rules’ which already restrict income tax relief on pension contributions (which can include those paid by employers). Anyone with income in excess of £130,000, should seek advice before making annual pension contributions of more than £20,000.

So what can you do now to reduce the effect of the 2010/11 tax increase?

• Owner-managers are probably best placed to make savings. Paying dividends before 6 April 2010, will ensure that you avoid the effects of the tax hike (the funds withdrawn can always be lent back to the company to provide necessary working capital, and withdrawn at a later stage in place of income taxed at 50%);
• Employees could be paid bonuses before 6 April, or even be paid in advance;
• Unincorporated businesses, which draw up accounts to
  31 March or 5 April, will benefit from delaying expenditure or advancing income, provided these measures are not overridden by accounting practice;
• Bank accounts can be shut before 6 April 2010, to bring forward income into 2009/10 rather than 2010/11.

Click here for further details on the above.

Although the existing pension anti-forestalling rules appear draconian, the plans are to worsen the tax relief position from 6 April 2011. From that date many high earners will not receive any higher rate tax relief on any contributions, so paying contributions to maximise tax relief in 2009/10 (and 2010/11) seems to be an opportunity not to be missed.

If relief for pension contributions has already been exhausted, there are alternative investments (eg EIS and VCT) which provide an element of upfront tax relief and additional tax breaks. The possibility of carrying back EIS relief to the previous tax year also provides flexibility.

There are also fears that the capital gains rate might increase. Currently the rate is 18% (with a 10% rate where entrepreneur’s relief applies). These rates to seem low compared to the proposed 50% rate, so anyone with gains in an investment portfolio may wish to realise them prior to 6 April 2010.

This deals with some of the things that can be done between now and the end of the 2009/10 tax year. There are a number of possibilities for tax saving once we are into the new tax year.

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