By Adrian Walton, Corporate Tax Director at Smith & Williamson
One thing is certain — anyone with taxable income of £150,000 or more is in for a bigger tax bill for the foreseeable future. So what can be done about it?
There are a number of ways to maximise the reliefs and allowances available and minimise your tax bill.
EIS and VCT investments
Make Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investments in 2010/11 to reduce income tax liabilities. Also, tax can be deferred on capital gains realised on any assets up to three years prior to, or one year after, the investment in EIS shares.
Invest for capital growth
The current CGT fixed rate of 18% remains very favourable in comparison to the new top 50% income tax rate, although there is a strong possibility that the CGT rate may increase.
Consider the timing of transactions in order to maximise tax relief and lower your income tax liability. For example, you might time the disposal of shares where the resulting loss can be claimed against income so that the loss crystallises after 5 April 2010, or use gift aid to lower income levels. Deferring deductible expenses to next year could lower your income tax liability.
Married couples and civil partners should ensure they are both using their personal allowances and lower rate bands by equalising the ownership of income producing assets, particularly if one will be subject 50% income tax rates and/or a restriction on his/her personal allowance. Watch out for stamp duty land tax on property assets.
60% marginal tax rate
From 6 April 2010, those with income between £100,000 and £113,000 are subject to an effective rate of tax of 60%. They should reduce their income by way of pension contributions and/or charitable donations to prevent a restriction in personal allowance.
Use the annual savings allowance for Individual Savings Accounts which will increase from £7,200 to £10,200 in 2010/11. The increased allowance already applies to people over 50.
Sole traders and partnerships
Consider incorporation or including a corporate member, to reduce tax liabilities on retained profits.
Mix short-term incentives (e.g. cash, pension contributions and government approved remuneration, such as childcare vouchers) with longer-term incentives (e.g. share options and free shares tied to performance targets) for employees. Combine these with ‘salary sacrifice’ arrangements to reduce employer and employee NIC liabilities.
From 6 April 2011 tax relief will be restricted for individuals whose taxable income (in some cases including employer contributions) exceeds £150,000. Anti-forestalling rules are in place that could impose a tax charge on pension contributions in the years leading up to 2011. Consideration should be given to utilising the available higher rate tax relief while it remains available. However, careful planning is needed by high earners considering pension contributions totaling over £20,000 annually.
Consider an EFRBS
Employer-Financed Retirement Benefits Schemes (EFRBS) are essentially unregistered pension schemes. They are currently viewed as a neat but somewhat specialist solution to the new 50% tax rate and new pension capping rules.
There will always be practical factors to balance against purely tax saving measures, and the suggestions above are not exhaustive. However, with pertinent planning, it may be possible to reduce or delay tax liabilities and generally minimise the impact of the changes to income tax and pension contributions.
For advice on how to minimise tax and optimise tax relief, register now to arrange your complimentary tax strategy surgery, or contact Adrian Walton on 020 7131 4180 or email firstname.lastname@example.org
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