Those of us who have an income of £150k+ have the unwelcome prospect of a new 50% tax rate with effect from April 2010.

A multitude of mitigation and tax avoidance options have been suggested by several contractor accountants that range from the sensible to the ridiculous. Below we look at some of the available options and consider what the pitfalls could be.

Speed up the surrender of non-qualifying life policies

Accelerating the surrender of bonds (non-qualifying life policies) can be an effective way for higher rate taxpayers to escape he income tax liability incurred on higher rate taxpayers.

Be warned: The surrender is taxed per “policy year”, not tax year so ensure that any surrenders will be taxed pre April 2010.

Involve your spouse in your business

A taxpayer operating a company can allow their spouse to have 50% of the business shares even if they have little involvement in the business. The new 50% tax band extends the advantage of making such arrangements, as well as encouraging the transfer of income-producing capital to a lower-earning spouse.

Be warned: Make sure any such arrangements are set up correctly, otherwise they will not be successful. Also, the Government wants to block this option so it may just be a short-term solution.

Accelerate the payment of salaries, dividends and bonuses

You will clearly benefit by accelerating the payment of any dividends from your own company to pre 6 April 2010. Some commentators have extended this idea to paying, for example, three years’ salary in return for the employee waiving rights to salary for the same period.

Be warned: The “accelerated salary” will is fraught with potential danger and should only be used for family businesses.

Executive remuneration – use of share options

After the new tax rate comes into force, the difference between income tax (up to 50%) and Capital Gains Tax (up to 18%) will be greater than ever. Converting income into capital is an attractive option, especially for executive remuneration where share options are popular.

Be warned: There is highly complex legislation surrounding employee incentives and you should seek professional advice. Other “conversion” techniques are subject to longstanding and byzantine anti-avoidance legislation. Implement with caution!

Check your bank accounts

Banks pay interest on deposits at regular intervals, sometimes annually. If you’re likely to receive a significant interest payment in, say, May, the only sensible way of accelerating this is likely to be by way of closing the account. Be warned: Banks have penalties for closing accounts that could out-strip the benefits.

Change your accounting periods

A change of accounting date can have the effect of accelerating profits into 2009/10 if you run an unincorporated business.
Be warned: As with most financial dealings, the rules dealing with this are complex and often have unexpected effects. It’s imperative that you seek professional advice before implementing such a change.

What next?

As there are obvious pitfalls attached to all these methods, you should seek professional advice from your financial advisor or online accountant before implementation.

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If you are setting up your own company, it is an absolute necessity to have a bank account for it. This ensures that company and personal money are kept entirely separately.

More importantly, banks are not willing to let you use personal accounts for business purposes; the two are bound by differing laws on disclosure, for example and no bank will willingly put themselves in breach of those regulations.

So which bank to choose? It is tempting to use the same one as you currently bank with, but they may not necessarily be the best choice. Consider the following factors:

• Bank charges and interest rates – these are wildly different to personal accounts
• Easy access savings accounts – you will accumulate “dead” money for VAT, CT and the like, which may as well earn money for you
• Bank debit or credit cards – useful for purely business purchasing
• Internet access – almost a given if you’re working away from home
• Free offers – many banks offer free banking for new business.
• Other services – not an immediate need, perhaps, but look at things like overdraft and loan facilities, which may become necessary.

Once you have chosen the bank, opening the business bank account itself is fairly straightforward. You will probably need to meet their small business account manager and you will need the be able to provide the following as a minimum:

• Company Certificate of Incorporation, to prove the company exists
• Some form of personal ID, such as a passport, to prove who you are
• A utility bill, to prove your address
• Possibly a signed contract or other proof that you genuinely intend to operate as a trading business.

These accounts can take a while to set up; one working week is a fairly typical minimum. If you are working through an agency, they will need the bank details as soon as possible so they can pay you, but don’t be tempted to park any monies in your personal account. Chase your account manager if the delay is causing problems. Once it is up and running, keep it clear in your mind that this is the company account and manage it accordingly.

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Having made the decision to work through your own limited Company, there are a few steps to take to set it up. Always remember the Company is a separate legal entity and never mix its affairs up with your own.

Choose a Name

The name has to be unique, obviously, and not likely to be confused for someone else’s existing name. The best reference point is the Companies House website which has a simple search facility so you can check your chosen version. Also, try to avoid names that are specifically related to your line of work, just in case you want to change careers later: imagine selling cars though a company called Al’s Bakery.

Decide on Share Ownership

Is this just you, or you and your spouse, or you and two or three other people? This is important, because it defines how to allocate the Ordinary Shares In the company. Dividends are paid in direct proportion to numbers of shares held. A husband and wife typically have 50% each, for example, but if one is already earning money, be aware of the impact of the share income on their tax position. Share allocation can be changed after the event. There are several variations on share management; but for anything other than a simple allocation of ordinary shares, get expert advice.

Register at Companies House

There is an online system you use to set up your company and pay the registration fee. It is fairly simple to use. One question it will ask is who the directors are. For a typical small contractor company you only need one but there’s no reason not to have more. Although not strictly necessary any more, it also helps to nominate a Company Secretary: this could be the same person, but it’s more sensible to have someone else, a partner or relative for example.

Register a Memorandum of Association

Something else to do while you are at Companies House. At its simplest this is a document describing what your company is for and how you wish to run it. You can do it yourself, but the document can have legal implications in a tax investigation so do some online research for a suitable template from sites such as Simply Docs or Click Docs.

Set up a Bank Account

This has to be a business bank account. Banks are increasingly wary of new business bank accounts, so you will have to answer some detailed questions and it will help if you have some professional references and a signed contact to demonstrate you actually will have an income.

Register for VAT

You have to do this if your annual income is in excess of a set amount (currently £67,000 pa) but it Is advantageous to register anyway. VAT and the Flat Rate Scheme are discussed in more detail elsewhere.

And that’s it. It sounds complicated but is in fact quite straightforward. You can also take the easy way out; either use a company formation agent, or there are several accountants who specialise in contractors who will set up all if the above for you for a small fee, or even for free, as well as providing expert support. Finally keep track of all your various expenses setting the company up, since you can reclaim these once you start trading.

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