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50% Tax rate and personal allowance restriction - Pre 6 April 2010 Tax planning ideas

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2 November 2009

Tax Planning Ideas - Save tax with our pre 6 April 2010 tax planning ideas 

Whilst the country is officially out of recession, many individuals and businesses are still feeling the effects of the 18 month downturn. With the 31 January filing deadline passed, now is the ideal time to review your tax position to ensure you are paying no more tax than you need to.   

These ideas are not exhaustive and are not covered in detail. To discuss your specific circumstances please contact your usual Hazlewoods contact or e-mail tax@hazlewoods.co.uk.

50% tax rate and personal allowance restriction-

How the 50% tax rate will work

From 6 April 2010 all income over £150,000 will be taxed at 50%, except dividend income which will be taxed at an effective rate of 36.1%.

How the personal allowance restriction will work 

From 6 April 2010 those earning over £112,950 will lose their entitlement to the tax free personal allowance (£6,475 for 2009/10 and 2010/11) with a restriction in the allowance for those earning over £100,000.

Possible planning ideas to consider

  • Accelerate income to the current tax year e.g. bonuses or dividends, to be taxed at the current highest rate of 40%. Be aware that this will accelerate the date tax is payable.

  • Defer claims for tax reliefs such as capital allowances or income tax losses. This will also accelerate tax payments.

  • Equalise income between spouses and civil partners. You should ensure both parties fully utilise their personal allowances and lower rate tax bands where possible.

  • Sole traders or partnerships could change their accounting year end to bring forward the taxation of profits, but at a lower tax rate.

  • The use of a share incentive scheme (link to pay rises in equity section) such as the Enterprise Management Incentive.

  • Pension contributions could be used to reduce your income for 2010/11 down to £100,000 or below. The effective rate of tax relief will be 60% on contributions reducing income from £112,950 to £100,000.

  • If you have a significant sum on deposit and the account pays interest once a year and this will fall after 5 April you may be able to close it before then and receive the closing interest. 

  • From 6 April 2010 trusts that can accumulate income (mainly discretionary trusts) will also be subject to the increased tax rates. There are several things you can do to mitigate this, these include:
      • distributing accumulated income before 6 April 2010 (but only the proportion that will utilise the tax pool);
      • distributing income on a regular basis rather than accumulating; and
      • appointing a right to income to one or more of the beneficiaries.

  • Review your investments and consider changing them to maximise capital growth to be taxed at the lower capital gains tax rates (currently 18%, but be aware that this may change).

  • Consider investing in a qualifying Enterprise Investment Scheme ("EIS") company or a Venture Capital Trust ("VCT"), although these are higher risk investments they come with tax advantages.

  • Consider deferring gift aid payments until after 6 April 2010 when you should get relief at 30% rather than 20% on your donation.

  • With the small companies rate of corporation tax being 21% it may be worth considering incorporation or the introduction of a company into the business’s structure.