Tax Strategies in a high tax environment
Paul Windsor, Partner at WSM Partners LLP highlights the need for tax strategy in a high tax environment.
The era of the Additional Rate Tax has now been in place for almost a year. Partners and the self employed, in fact all non-PAYE earners, with income over £150,000 during the 2010/11 fiscal year will be making their first payment of this extra tax on 31st January 2012.
For a partner earning £250,000 in both the 2009/10 and the 2010/11 tax years, the tax impact of the withdrawal of personal allowances together with the additional rate of Income Tax will be to create an additional liability of a staggering £12,590. There will also be an increased payment on account to be made in respect of the 2011/12 tax year, so the additional tax payment due at the end of January 2012 will be £18,885 assuming the same level of income as the year before.
Incorporation of Partnerships
There has never been a better time for businesses to give serious consideration to the incorporation of their activities. As a separate legal entity a company is charged to corporation tax which is levied at 28% (27% from April 2011) with a small companies rate of 21% (20% from April 2011) with further reductions promised during the Chancellor's current term of office. More importantly the incorporation provides an opportunity to crystallize the value of a business as a capital gain, allowing up to £5m to be allocated to each partner at a reduced Capital Gains Tax (CGT) rate of 10%.
Although this step triggers an unnecessary liability to CGT it will create a pool of tax paid reserves available to the owners to draw down, free of any further income tax or national insurance, as the business generates sufficient cash flow from its future trading profits.
In today's higher income tax environment it is important to try and bring non-earning or low-earning spouses and/or family members into family businesses and sole traders should give consideration to bringing in partners. Provided there is good economic justification for sharing the income and profits across a wider base of taxable individuals, such prudent use of allowance and thresholds must be given serious consideration.
Contributions into pension schemes are not quite as dead as some would have us believe. There is still an opportunity to attract additional and higher rate tax relief on pension contributions although these will be restricted to the maximum contribution of £50,000 from April 2011.
The whole area of pension planning is highly complex and fraught with opportunity for missed claims and claw-back of reliefs, so advice from your financial advisor is essential.
Since the Additional Rate Tax is supposedly a temporary measure, any strategy to defer income into future tax years is worth keeping in mind. This is often more easily said than done however there are many investment products available which will effectively 'roll up' income and gains to be taxed at a later date when either the tax rate or your income have declined.
RM2 are pleased to recommend the services of WSM Partners as specialists in business tax advice.
If you wish to discuss any of the issues raised in this article, please contact WSM partners at email@example.com.