The 50% tax rate

Q: With the income tax increase just around the corner, what can I be doing to limit my exposure?

A: The highest rate of income tax is due to rise to 50% from 6 April 2010 for taxpayers with income over £150,000. Below are a number of planning measures that may be appropriate to consider.

The simple solution would be to bring forward income into the current tax year. For example, a director shareholder could vote himself a bonus or a dividend prior to 5 April 2010, to ensure that it is taxed at the existing rate of 40%.

Alternatively, a business owner may be able to defer incurring tax deductible expenditure until after 6 April 2010. For example, a capital expenditure programme or major repair costs.

Unfortunately, the Government has chosen to limit the amount of pension contributions that qualify for higher rate tax relief, with complex rules that limit the amount that can be contributed to £30,000 in specified circumstances.

Sole traders and partnership businesses generating large profits will now look towards incorporation of their business, where they can control the income that they draw from the company. Any profits retained in the company will be subject to corporation tax at rates of between 21% and 28%.

With the increased differential in the rates of income tax and capital gains tax, taxpayers will now look for ways of converting income into capital. For example, shareholders may look to make disposals of shares to other family members, instead of drawing income from the company.

And finally, we expect to see an increase in the numbers of people looking to emigrate – although that might be something to do with the British weather as opposed to the 50% tax rate.

Ian Smethurst, tax partner, CLB Coopers