An increase in the top rate of personal income tax for all income above £150,000 was announced in the 2009 Budget. The new 50 per cent rate will come into force from 6 April 2010. This is a significant increase (and an increase in the original figure announced in the Pre-Budget Report in November 2008, which stated that the rate would be 45 per cent as of April 2011) and also represents a structural change to the tax planning landscape.
The 50 per cent income tax rate (42.5 per cent on dividends) requires a structural change to tax planning to ensure that robust, practical and sensible planning is put in place, sooner rather than later, to ensure maximum tax-efficiency.
The new rate, and other changes announced in the 2009 Budget, mean that it is paramount that employees and investors carefully consider their tax position to explore what planning can be effectively put in place now to help mitigate or defer the upcoming increased income tax liabilities.
There is a range of sensible and effective options that will mitigate the impact of the forthcoming rate increase. Planning now rather than later is, as ever, the best approach and planning for both employment and investment income is essential. A bespoke approach will typically provide the best solution, since planning should always be appropriate to your particular tax and personal profile. Key factors will include your long-term residence plans, your various sources of income and your anticipated expenditure. Tax planning should be perfectly integrated with your commercial objectives, so your succession planning and business strategies will be relevant.
In addition, the gradual withdrawal of the personal allowance for those with incomes of £100,000 or more, and the restriction of higher rate tax relief for pension contributions for those with incomes of more than £150,000 (from April 2011) will increase the tax burden on higher income earners, giving a marginal rate of tax for some of 60 per cent. The transitional provisions on pension relief have immediate effect, particularly for those who usually pay significant annual contributions, such as senior executives and partners in professional partnerships.
Now is an appropriate time to review strategies to ensure they are consistent with your personal objectives.
One approach could be to maximise income so that it is subject to the current top rate of 40 per cent (32.5 per cent for dividends). Bonus payments, realisation of gains on unapproved share schemes, dividend payments or remittances of income, for those not domiciled in the UK, might be brought forward so that the income falls to be taxed before 6 April 2010.
Where a company is planning to purchase its own shares, with the shareholders taxed on the proceeds as income rather than gains, the value to shareholders would be increased by completing the exercise before the change in tax rates.
Of course, the timing cost of any action that accelerates the date for the payment of tax should be borne in mind.
For the self-employed and those in partnership, strategies to maximise profits taxable at 40 per cent rather than 50 per cent, for example, by changing the accounting date, could be considered.
Given the current differential of 32 per cent between the income tax and capital gains tax rates, from 6 April 2010 onwards capital returns will have a significant tax advantage over income returns. Various investment vehicles for trading, property holding or wider investment activities alongside tax-efficient profit extraction techniques could be considered.
Changing an investment structure could also be explored at a time when asset values are relatively low, so that any future returns deliver your longer-term objectives. How investments are held across the family should be reviewed to ensure holdings are efficient.
Another approach could be to plan to minimise exposure to the 50 per cent rate before it arrives. Strategies that allow income to accumulate in tax-efficient ways should be considered.
The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.