Late, late tax planning

The 2009 Pre-Budget Report in December signalled a significant number of tax increases in the UK designed to make up the significant Budget deficit following the banking crisis. For many or our clients there will be a significant impact on their finances.
-Income tax rates to rise and personal allowances to reduce for wealthier clients.
-Future changes to rates applicable for dividends, trusts and NICs.
-New 50% income tax band.

There are further complicated rules for pension relief restriction and the end of well-established tax breaks for furnished holiday lettings (currently enjoying business tax advantages). There is speculation about an increase in capital gains tax and I have heard different forecasts from various commentators.

We have about three weeks to do some quick planning which may mitigate in some part the higher tax payable on income receivable after 5th April 2010. It might be slightly less if restrictions are brought in with the 2010 Budget, for which we still await a date.

From 6 April 2010 there are higher rates of tax and fewer reliefs. Those earning in excess of £150,000 will be subject to a ‘super-tax’ of 50% on income over that threshold.

Furthermore, personal allowances will be restricted for those earning more than £100,000, at the rate of £1 for every £2 of income above that figure. As the current personal allowance is being frozen at £6,475 this means the full allowance will be extinguished at an income level of £112,950.

The gradual tapering of the allowance – within the narrow banding of £100,000 to £112,950 – means that where income falls within these limits, the effective rate of income tax is 60%.

In the current fiscal year ending in April it may be possible to convert income chargeable at 50% to gains chargeable at 18% or even an effective 10%. It would really depend on the circumstances of course, so no idle promises.

From 6 April 2010 there will be three rates of tax on dividend income. Where income falls within the basic rate band, the 10% tax credit will extinguish any liability, as before. The equivalent rate for 40% taxpayers remains at 32.5%, but a new rate of 42.5% will be introduced where income will be taxed at the new rate of 50%.

National Insurance contributions (NICs) are due to rise from April 2011 (a further year on), but if these go ahead as planned they will add another 1% to the rate, which is a significant uplift and may be a very sobering thought as people look ahead. Businesses could consider paying themselves in advance through salary or dividends, or paying their employees early bonuses but these are tough times from the point of view of cash flow. Still, any available option should be considered.

Our clients' finances and tax positions need to be looked at in the round; taxation of small businesses is inextricably linked to the reward and taxation of their owners and their families. Whilst high earners will bear the brunt of the initial increases, every taxpayer will feel the effect. These are tough times and tough decisions need to be made, although not to the long-term detriment of the businesses themselves. In addition, with a General Election in the offing we can only plan in the short term based on what we know now.

If you know anyone who may be affected make sure that their accountants and tax advisers are reviewing their tax positions in these next few weeks. Of course you may wish to talk to me about how I can help. Not everyone will have the flexibility to adjust their financial strategy, but it is worth checking.

Scary tax planning in a changing world

I cannot remember a time when the tax regime in Britain was in a position of such flux. As we know the cost of the banking crisis and the recession has cost the government, or at least UK plc dearly. There is a huge deficit to be made up, exacerbated by the futile policy of reducing VAT from 17.5% to 15% for thirteen months. There is talk that after the election whoever is in power will have to raise VAT to 20%. There is not much we can do to mitigate this in advance, and from the Government's point of view, indirect taxation on sales is inescapable. We are all paying VAT on a daily basis, and we have to hope that any currently exempt or zero-rated goods and services will not have a charge imposed.

At these sorts of times and particularly in advance of an election the parties find themselves painted into a corner. Are they honest and admit that services will have to be cut and that charges will have to be made in the NHS and in education, or do they keep quiet and get on with doing what they perceive is necessary when in power after May (we still assume the election will be in May)? Will taxation be raised even more after May?

Regular readers of this blog will know that my view is that increases in taxation are counter-productive because they encourage dishonesty. I don't like it, but that is the reality, especially in the cash businesses HMRC hate, but frankly are not equipped to do anything about. Those professionally represented businesses have a close eye kept on them by the likes of us, but many who are not and particularly those who are not even registered at all (the black economy) are very hard to catch. This does not bode well for the immediate future because we then have a division between the honest and highly-taxed legitimate law-abiding business and the dishonest who are better off because they do not pay their taxes and are robbing HMRC and therefore all the rest of us doing our best to stay on the straight and narrow..

So, what do we professionals do? There is some tax planning which seems tempting in terms of the 2009 Pre-Budget Report. We know that the rate of income tax is going up to 50% for taxable income over £150,000. There is also a withdrawal of personal allowances on income over £100,000, which means that there is a marginal rate of 60% for incomes just over £100K and when you add in National Insurance the situation seems scary. What do we tell our clients to do? Have their bonuses now (unless they are in the bankers' trap), have them much later, or leave the country?

Well of course, it might be an idea for owner-managers to pay themselves dividends at 32.5% instead of 42.5% after April if they are in that sort of league. It might be sensible for spouses and partners to equalise their incomes to reduce rates, but frankly those sorts of arrangements may well be in place, especially as the income-shifting legislation is currently on the shelf because it was impractical and ill-thought out. However, being impractical and ill-thought out has not always prevented legislation from being introduced, and there is still the spectre of perhaps a higher charge on dividends in general or an imposition of NIC.

Our clients should talk to their financial advisers in view of the changes to the pension regime from April and the further restrictions on tax relief on premiums paid.

The whole point is that I cannot remember a period of so much uncertainty in the tax world. In past years we have planned ahead, but now we can and must take action on many fronts before April, because we know not what is round the corner. Our planning may not help our clients after April, but we must talk to them to see what we can do now.

From a business point of view, the one thing worse than a recession is the inability to plan ahead, because who knows what tax costs are round the corner? That is why I wish the party in power could be more candid about its general plan on tax increases. I wish the opposition would say that whilst it cannot reduce the proposed increases in the short term it will not invent any new taxes and that it will cut services, so that at least we know where we stand. The election is badly needed in terms of politics, but it is getting in the way of all our lives in terms of knowing where we stand or fall. How can a business make plans if it has no projection on costs?

March 2009 Tax Update and newsletter

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