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Remuneration planning - minimise total tax liability

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3 August 2012
For the tax year ended 5 April 2013, each individual has a tax free personal allowance of £8,105.  The next £34,370 of income will suffer income tax at a rate of 20%.  Total income exceeding £42,475 will suffer income tax at a rate of 40%, until total income exceeds £150,000, when income will be taxed at a rate of 50%.  Where an individual has taxable income over £100,000 they will lose some or all of the personal allowance, giving an effective tax rate of 60% on income between £100,000 and £114,950

Profit extraction from farming businesses

Farming businesses should ensure that the individual owners of the business, plan their extraction of remuneration to ensure that tax free personal allowances are fully utilised. The income of a husband and wife should be equalised, to ensure that one is not paying tax at a rate of 40%, while the other has not fully utilised their 20% tax band. Additionally, it should be ensured that income is not taxed at 40% in the 2014 tax year, whilst the 20% tax band has not been fully utilised in 2013.
 
Possible remuneration planning

Possible planning could include:

  • varying profit shares in a partnership
  • ensuring that dividends paid from a company are paid to the spouse with the lowest tax rate
  • interest bearing accounts are transferred to the spouse with the lowest tax rate
  • dividends are paid before or after 5 April, to fully utilise lower rate tax bands
  • interest bearing accounts are closed in the 2013 tax year to accelerate the receipt of income and fully utilise lower rate tax bands
  • the use of pension contributions

From 5 April 2013, the 50% tax rate is to be reduced to 45%. Therefore, where income is expected to exceed £150,000 in the 2013 tax year, where possible, planning should be undertaken to delay income occurring until after 5 April 2013.

Going forward

Individuals should ensure that for the year ended 5 April 2013, they fully utilise their tax free personal allowance. Husbands and wives should also ensure that they equalise their income to ensure that one is not paying tax at a rate of 40%, while the other has not fully utilised their 20% tax band.

If you would like to discuss tax planning issues please contact Nick Dee or Peter Griffiths on 01242 680000.