Steve Collins, Partner and Head of Tax at Francis Clark, suggests ways of avoiding the worst of the 50 per cent tax regime

Recently announced tax rises will cut the average income of those earning more than £100,000 by 13 per cent, according to the Institute for Fiscal Studies think tank*.

The big culprit will be the new 50 per cent tax rate on taxable income over £150,000, which comes into effect next month, on April 6th.

Other factors affecting tax for higher earners in 2010/11 include a new, higher, 42.5 per cent rate for dividend income, when income is above £150,000, and the phasing out of tax-free personal allowances for anyone with an income over £100,000. Personal allowances will taper away by £1 for every £2 earned over £100,000, until there is none left for income over £112,950.

From April 6th, 2011 tax relief on pension savings for those with a taxable income of £150,000 or more is set to reduce. This will be achieved through tapering to a lower limit of 20 per cent. Some restrictions are already in place to prevent the boosting of pension funds ahead of this date.

Solutions
What can you do to avoid the worst of this new regime? First and foremost, plan now for tax takes next year because time is needed to set up the necessary measures.

Depending on your individual circumstances, you may wish to consider mitigating the 50 per cent rate through some of the following options:
• bringing forward to 2009/10 any income which would next year be charged to tax at 42.5 per cent or 50 per cent - but bear in mind this will affect your tax payments on account
• postponing deductible business expenditure to 2010/11 in order to reduce next year’s profits
• if trading as a partnership, withdrawing capital and reinvesting it as a loan – this could give 50 per cent tax relief next year, but careful structuring is required to meet the legislative requirements
• if trading as a sole trader or partnership, changing your accounting date
• for trustees of discretionary trusts, granting life interests could avoid the new trust rates.

Trading structure
If you are in a sole trader or partnership business, consider trading either wholly or partially through a limited company.

This could save significant amounts of tax and national insurance. However, you should take advice as there can be disadvantages such as restrictions on the tax reliefs which might otherwise be available to you.

Investments
The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) offer interesting investment opportunities and the chance to reduce your tax bill. Both schemes are designed to encourage investment in new UK businesses.

While such investments carry risk and there are limits on the minimum investment period, your income tax bill could be reduced by 20 per cent of any EIS investment or 30 per cent of any VCT investment. Additionally, dividends from a VCT are free of income tax.
 
Use Individual Savings Accounts (ISAs) to their limit. From April 6th 2010, the limit increases to £10,200 for all age groups, whereas previously this limit applied only to the over 50s.

Spouses and partners
Where spouses or civil partners are paying income tax at different rates, tax can be saved by moving income producing investments to the lower earning partner. There are no capital gains tax consequences as long as you are not separated.

Owner-managed limited companies can pay dividends to the owner-manager’s spouse or partner.

Seek advice
With any action involving tax legislation, it is vital you seek the best professional advice you can find in order to avoid expensive interest charges, penalties, unnecessary tax bills and tax enquiries.

For further information:

Contact the Francis Clark Tax Team. Telephone: 01803 320100

Francis Clark has offices in Exeter, Plymouth, Salisbury, Taunton, Tavistock, Torquay and Truro. Francis Clark is the winner of the ‘Auditor of the Year - Mid Tier’ in the National Financial Directors’ Excellence Awards 2011, and LexisNexis Best General Tax Practice Award 2009. More information is available by logging on at our Online Information Centre