Q: "What can I do about the huge tax hikes announced in the 2009 Budget?"A: Alistair Darling’s 2009 Budget included some very significant tax-increases which will, without a doubt, act as a huge disincentive to entrepreneurs in the UK. There will be a massive increase in the tax bill of people with an annual income in excess of £150,000 due to the complete removal of the tax-free personal allowance (from April 2010), the introduction of the 50 per cent income tax rate (from April 2010), and the restriction of tax relief on pension contributions paid by the individual (from April 2011). Ironically, for particularly wealthy individuals, these increases will probably mean even less UK tax being paid. Schemes to legitimately reduce UK tax liabilities, although expensive and sometimes complicated, will become more and more worthwhile for the rich and provide a loophole to escape these hikes. Indeed, this is the main reason why the Institute for Fiscal Studies calculates that these tax increases will generate zero additional revenue to the Treasury.
However, not everybody has the wealth and overall flexibility (in terms of lifestyle, family commitments, and so on) necessary to side-step these tax increases. So what can be done?In the short term at least, we will be advising our clients to look at the following ways of trying to mitigate these additional tax costs: Wherever possible, bring-forward income in to your 2009/10 Tax Return. Say your income for both 2009/10 and 2010/11 is expected to be £250,000. You will be paying 50 per cent income tax on the £100,000 above £150,000 in 2010/11. The overall tax cost will be significantly lower if you are able to bring forward £100,000 of income into the 2009/10 period (e.g. an owner managed business could ensure it pay its dividend on 31 March 2010, rather than in April, May or June). This is because that £100,000 would only be taxed at 40 per cent. (So, in this example, your reported income would be £350,000 in 2009/2010, £150,000 in 2010/11).Where income from your company can’t be brought-forward before April 2010, dividends will (as a general rule) be even more tax-efficient than taking a salary/bonus.
Obviously you should speak to your accountant in order to ensure that this is the case in your specific circumstances.Utilise salary sacrifice Payments could be made to your pension pot directly from the company. A properly constituted salary sacrifice scheme will reduce an individual’s income for both income tax and NIC purposes, without reducing the overall remuneration package. For example, instead of taking salary and/or dividends totalling £200,000 for the year, and having the company pay £25,000 into a pension plan, an owner-manager might take a salary plus dividend total of just £150,000 and have the company pay £75,000 into their pension. The overall amount paid by the company is the same, but the income tax (and national insurance) bill to the individual should be significantly lower. Martin Dunne is a partner at Sayers Butterworth LLP. He previously worked in the entrepreneurial services division of Ernst & Young, and has over 15 years of experience working with fast-growing, entrepreneurial businesses. He provides practical and commercial advice to clients ranging from start-up stage to AIM-listers in a variety of sectors including retail, property, manufacturing, technology and media. Related articles"How will the record-low base rate affect my business?” "How do I maximise the cash flow of my business?”"Do I have to pass on the VAT cut to my customers?"
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