From Branston Adams (Chartered & Certified Accountants), Surrey.
Two of the UK’s leading business groups are calling on the Government to set out clear and credible plans for tackling the UK’s £178bn deficit. In its Budget submission to Chancellor Alistair Darling, the Confederation of British Industry (CBI) has urged the Government to set out more details of its departmental spending plans, and to bring forward its targets for balancing the books, in order to obtain the critical objectives of boosting confidence in the public finances and fostering economic stability.
The CBI believes that the Government’s target date for achieving budget balance in 2017/18 is too far off, and that the bulk of the deficit should be addressed by 2015/16. This would be achieved by adjusting expenditure plans, rather than increasing taxes. Richard Lambert, CBI Director-General, said, ‘The UK’s deficit, though worryingly large, is still manageable, but the Government must act now to set out a convincing, credible pathway for balancing the books’.
He added, ‘The Budget should do whatever is necessary and possible to maintain and strengthen this country’s reputation as an attractive place for investment. The planned rise in National Insurance Contributions is particularly ill-judged. It is a direct tax on jobs and should be reversed’.
Meanwhile, the Institute of Directors (IoD) is calling for an incoming Government to act on the deficit as soon as it takes office.
Publishing its Business Manifesto 2010, the organisation echoes the CBI’s views that fiscal tightening should be based on lower public spending rather than higher taxation. Miles Templeman, IoD Director-General, said, ‘We are convinced that we need swift action to tackle the budget deficit. The argument that early cuts would jeopardise the recovery is mistaken. We believe that lower spending is likely to trigger a whole series of positive developments that will assist growth’.
Planning for the 50% Income Tax Rate
Higher earners should take action now to help minimise the effect of the new 50% top rate of income tax. If you are likely to have income in excess of £100,000 for 2010/11, you could use the following strategies to reduce your total taxable income.
Accelerating Income
Consider accelerating income into the 2009/10 tax year by bringing forward bonus and dividend payments, and possibly the realisation of gains on unapproved share schemes, ahead of 6 April 2010 so that income is taxed at 40% (32.5% for dividends).
Changing Your Accounting Date
If you are self-employed and have an accounting year end of 6 April or later, you will be paying tax at the higher rate of 50% on income over £150,000. You may wish to consider changing your accounting date in order to shift profits into 2009/10.
Incorporation
While incorporating a business currently run as a sole trade or partnership is not always advantageous, there may be some potential benefits. A change of accounting date or incorporation requires careful thought; we can review your figures and expectations for your business, to help you to decide if either of these options is right for you.
Restricting Income
If you run your business through your own company, you may wish to consider restricting your income to below either of the two key thresholds of £100,000 or £150,000 byreducing your salary and dividends and leaving any surplus cash in the company.
Transferring Income
If your spouse or civil partner has a lower marginal tax rate, you could consider either transferring ownership of income generating assets such as shares, let property or bank deposits to your spouse, or changing them to joint ownership. Where your spouse is involved in your business, care must be taken to ensure that you comply with all of the necessary legalities.
Remuneration Options
Salary sacrifice schemes may allow a saving to be made, by replacing taxable income with certain benefits-in-kind. The benefits may themselves be taxable, so it is important to factor this in when considering the savings. The new restrictions on pension savings may make share based reward schemes more attractive forms of remuneration, allowing income to be taken as a capital return. Approved share schemes could result in a capital gains tax liability of 18%, compared with a potential income tax liability of up to 50%.
Pension Payments
Pensions are a complex area for those whose income reaches (or has reached) more than £130,000 per annum, but maximising pension savings could reduce your marginal rate. Please contact us for further advice.
For further information and details of more strategies to minimise the effect of the new rates, such as deferring tax relief, tax-efficient investments, and making charitable donations, please visit the Hot Topics section of our website. Please contact us for advice on your individual situation before taking any action.