Personal Tax Planning – The 50% Tax Rate

The introduction of the new 50% rate is now just a few months away but there is still time for you to plan for it's introduction. 

You can mitigate some of the effects of this new higher rate of tax by correctly timing some of your financial decisions and by ensuring that you take full advantage of tax allowances and tax-efficient savings vehicles. 

This article includes 10 tips to help you minimise the effect of the 50% tax band on you and your family.

Before the tips here's a quick reminder of how the 50% tax rate will operate. 

All income over £150,000 will be taxed at 50%, except for dividend income which will be taxed at an effective rate of 36.1%. In addition those earning over £112,950 will lose their current entitlement to the tax free personal allowance (currently £6,475). There will also be a restriction in the allowance for those earning over £100,000.

Additionally most types of trusts will suffer the 50% tax on all non-dividend income over £1,000 from 6 April 2010.

And now for those tax minimising tips:

1. You should consider whether you can bring forward income from the next tax year into this tax year. Is there any scope to take bonuses or dividends before 5 April 2010 so that they will be taxed at the current 40% tax rate? Might your employer be willing to pay you a few months salary in advance. Obviously by advancing the date of the receipt of income you will also advance the date when the tax is payable albeit at a lower rate.

2. You should consider asking your employer to consider implementing a share incentive scheme as part of your remuneration package. There are several Government approved schemes which allow employees to benefit from the growth in value of their employing Company at capital gains tax rates rather than income tax rates. For high earners this would result in the payment of a lower amount of tax than for an income tax applicable bonus.

3. You should review your interest paying accounts. If they pay interest only once a year and that date will fall after 5 April 2010 then you should consider closing the account prior to the end of this tax year so that the bank will pay the closing interest accrued to date and so that the interest will be taxed in the current tax year. Bear in mind that there may be notice periods with associated penalties for closing some accounts.

4. You should review any life assurance based investments from which you can currently take a 5% withdrawal tax free each year. On encashment such profits are subject to income tax so you should consider whether you should encash any such investments before 5 April 2010. Similarly any growth in value of treasury stock can be subject to income tax so you should consider realising the value on any such investments before 5 April 2010.

5. If you have family trusts which will be affected by the new 50% rate then you should consider making distributions of all accrued income to the trust's beneficiaries before 5 April 2010.

6. You should review your investment portfolio. You should consider holding investments that produce growth in the form of capital which is therefore subject to capital gains tax rather than income which is subject to income tax. If you have any cash requirements then these could still be met but via the disposal of assets from within the portfolio rather than dividend income.

6. You should try and equalise income between you and your spouse. If you earn more than £150,000 and your spouse doesn't then you should consider transferring income producing assets to your spouse to take advantage of their lower rate tax band. You should also consider who acquires future income producing assets to ensure the application of lower rate bands and as should always be the case the correct usage of the otherwise unused allowances of your spouse and other family members.

8. You should discuss with Accura Accountants or your financial adviser whether you should make an investment in a qualifying Enterprise Investment Scheme ("EIS") company or a Venture Capital Trust ("VCT"). These higher risk investments have associated generous tax breaks.

9. You should consider deferring any claims for tax reliefs such as income tax losses from this year until the tax year ended 5 April 2011 as tax relief will be then available at 50% rather than 40% now. You should similarly consider deferring any claim for capital allowances to the year ended 5 April 2011 as tax relief will be then available at 50% rather than 40%.

10. You should consider deferring any gift aid payments until after 6 April 2010 so that you will get tax relief at 30% rather than 20% on your donation. Obviously you should consider the impact that this will have on the charity as well.

If any of the above tips are of interest to you then please contact your usual contact at Accura Accountants or by emailing Jon Bregman