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How to Beat the New 60% and 50% Tax Rates

Newsletter issue - May 09.

The 60% tax rate will apply to the portion of taxable income falling between £100,000 and approximately £113,000, due to the gradual reduction in the basic personal allowance between these thresholds from 6 April 2010.

The 50% rate of tax will apply to the portion of taxable income over £150,000, also from 6 April 2010. This adds up to a top rate of 51% including the additional rate of national insurance paid by both employees and the self-employed. It's worth noting that the 1% NI rate will become 1.5% from 6 April 2011, and all the other rates of NI will also increase by 0.5 percentage points from the same date.

Where your accounts year ends on 30 April, as many long-established partnerships do, the profits made in the year starting 1 May 2009 are taxed in 2010/11, when the combined 51% rate kicks in above £150,000. Therefore, if you are self-employed the profits you make from 1 May 2009 onwards could be subject to tax and NI at 51%.

A useful way to reduce higher rate tax at the margins has been to make pension contributions, which have attracted tax relief at the taxpayer's highest margin rate, as long as the annual allowance (£245,000 for 2009/10) was not exceeded. The bad news is this tax relief will be gradually restricted down for those with income over £150,000 from 6 April 2011. There are also anti-avoidance provisions which mean any attempt to change the pattern of pension contributions from 22 April 2009 will in ineffective for those earning £150,000 or more. However, there is no mention in the Budget Notes of any restriction for those with income between £100,000 and £113,000.

If you are likely to be in this income band for 2010/11 you could use the following strategies to reduce your total taxable income:

  • Pay personal pension contributions into a registered pension scheme.
  • Get your employer to pay pension contributions into your pension scheme and reduce your gross salary proportionately.
  • If your spouse has a lower marginal tax rate, transfer income generating assets such as shares, let property or bank deposits into your spouse's sole name.
  • Make gift-aided charity contributions.

The last two bullet points will also work for those with total income over £150,000.

If you run your business through your own company you can restrict your taxable income to below the £100,000 or £150,000 thresholds, by reducing your salary and dividends and leaving any surplus cash in the company. A self-employed person is taxed on the total profits the business makes whether or not the cash is extracted from the business. If you are self-employed, incorporating your business at this time will allow you to control your marginal tax rate more effectively in the future. Talk to us to find out how this could work for you.

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