Seb Tubb, tax partner at Mazars gives valuable pointers following an unwelcome announcement in this year’s budget.
From April 2010, the top rate of income tax will be 50 per cent for individuals with an income over £150,000. In addition, restrictions will apply to personal allowances where income exceeds £100,000, and lost altogether where income reaches £112,950. He offers some free advice.
Profit extraction by way of dividends:
Accelerating the payment of dividends by 5 April 2010 can achieve a tax saving of up to 11.1 per c ent. Extracting profits in this way is something that owner-managers and shareholders of businesses operating through one or more UK companies, should consider to avoid the new higher rates of income. After 5 April 2010 dividends of individuals with an income in excess of £150,000 will be taxed at an effective rate of 36.1per cent.
Incorporating a business to save tax:
Business owners should consider saving tax by incorporating their company if it is making substantial profits and they are planning to exit in the foreseeable future. Tax savings can be achieved by incorporating the business and benefiting from lower rates of tax under the corporation tax and capital gains tax (CGT) regimes. It is important to recognise that it is difficult to predict tax savings further into the future because CGT and income tax rates may change.
Reward employees through a share scheme:
Share schemes can offer a tax-efficient way of remunerating employees, providing tax advantages for both the employees and the company. They can be used to replace existing cash rewards, such as annual bonuses, reducing the cash drain on companies at a time when money is tight.
They are also useful for retaining key individuals and providing the opportunity to pay efficient dividends. However, specialist advice is necessary to set up the schemes properly to achieve the desired effects.
Gains on the sale of shares for employees will qualify for CGT at 18 per cent, if they are structured correctly; this may be further reduced to 10 per cent if Entrepreneurs’ Relief applies. For the company, the gain is often deductible against profits chargeable to corporation tax when shares are offered at a discount, or options are exercised.
Benefits of salary sacrifice:
Significant tax savings can be achieved by employees receiving a non-cash benefit in exchange for part of their salary, typically an employer pension contribution. This results in lower tax and National Insurance Contributions (NIC) for the employee and lower NIC for the employer as there is no income tax or NIC to pay on the sacrificed amount. However, new rules may mean that a salary sacrifice for pensions may not be effective for reducing taxable income below the £150,000 threshold. The employment law issues arising must be considered as well as the changes required for taxation purposes.
