2010: planning for a taxing time ahead
Income tax at the rate of 50% will be payable on taxable income over £150,000 with effect from 6 April 2010.
In another move to tax higher income taxpayers, their personal allowance of £6,475 will be taken away at the rate of 50p for every pound of income over £100,000, so that the allowance will disappear altogether when a taxpayer's income reaches £112,950.
All this makes the normal end-of-tax-year planning even more important this year. Some of the ideas worth considering are:
Bring income forward to before 6 April 2010. Consider how you might legitimately bring forward any income coming to you in the near future into the current tax year (2009/10) so that the top tax rate payable is 40%. That will normally be preferable to receiving income in the 2010/11 tax year, if the new 50% tax rate will apply.
Remuneration and dividends. If you have your own company, consider paying bonuses and dividends to yourself and/or relevant employees before 6 April rather than after. Of course, earlier bonuses will also bring forward PAYE and national insurance contribution liabilities. Dividends received in this tax year are taxable at a top rate of 32.5% in 2010/11, the top rate on dividends is 42.5%.
Husband-wfe partnerships and companies. Spouses and civil partners who are in business together may still legitimately divide profits or dividends between themselves so as to favour the lower earner or so that both partners' income falls below the £150,000 (or £100,000) threshold. Under the law as it stands, many such arrangements will pass muster, but it is important to get our advice to avoid problems with HMRC.
Approved share schemes. Consider opening or activating HMRC-approved share and option schemes. They can be very tax efficient and relatively easily established, but it is important to ask our advice on the choice of schemes.
Pension contributions. Tax relief at 40% is currently available on pension contributions for higher rate taxpayers, although certain restrictions have applied since April 2009.
After 6 April 2011, a person with a taxable income over £150,000 will have their tax relief restricted. Therefore, for those affected by these rules it could be worth making pension contributions that qualify for full relief in the current tax year. (See full article 'Pensions and tax relief')
Capital gains. A significant gap has opened up between the current tax rate on capital gains of 18% and the top income tax rate that will soon be 50%. An increase in the tax rate on gains is widely expected and so it might be worth considering making taxable disposals before 6 April 2010 rather than waiting until the new tax year. As usual, at the very least it is generally worth making disposals to use the annual exemption - which for 2009/10 is £10,100 per taxpayer.