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Ways Around the Proposed 50% Tax Rate

Ways Around the Proposed 50% Tax Rate

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.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Heroes by Frederic Poirot

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