From 2012/13 following the introduction of the High Income Child Benefit Tax Charge (HICBC) many higher rate tax payers have to navigate the effects of several different tax bands during their tax planning. Marginal tax rates can be as high as 70% of income.
The table below shows the different income tax bands and marginal rates that now apply for earned and investment income.
Strategies for avoiding higher rates of tax, or the HICBC or claw back of personal allowances depend on the taxpayer, as follows:
All taxpayers:
Watch timings so as to match expenditure which reduces gross income as necessary, this may be by:
- Increasing contributions into a registered pension scheme.
- Making donations under Gift Aid
Employees:
- Enter into a salary sacrifice arrangement with the employer where less taxable pay is paid in return for the receipt of employer provided non-taxable benefits such as child care vouchers or a mobile phone. Agree that a bonus award will be non-cash, for example, the employer makes available assets which are taxed at 20% of market value, see Salary sacrifice schemes
Self-employed individuals
- Think about incorporating the business; a company can be used as a money box, to shelter income from higher rate tax. By incorporating and disposing of goodwill to the company, whcih is left on a director's loan account, the individual can withdraw taxed capital over several years instead of paying dividends or a salary.
- Watch the timings of plant and machinery which qualify for the Annual Investment allowance (up to £25,000 in 2012/113). Plant and machinery includes vans.
Owner-manager shareholders
Where income is mainly earned as a low salary and topped up with dividends spouses can gift shares to each other, on a CGT no-gain, no-loss basis.
*The rates of tax applicable to dividends are bracketed - dividends are taxed as the top slice of income.
|
Bands |
Income £ |
*Rate of tax % |
Notes |
|
Personal allowance |
1 – 8,105 |
0 |
|
|
Basic rate |
8,106 – 42,475 |
20 (10) |
|
|
Higher rate |
42,476 – 50,000 |
40 (32.5) |
|
|
Higher rate |
50,001 – 60,000 |
40 (32.5) + CB1 |
CB1: Claw back of Child Benefit payments: 1% of the Child Benefit received for every £100 of income between £50,000 and £60,000 |
|
Higher rate |
100,001 – 116,210 |
60 (52.5) |
Claw back of personal allowance: restricted by £1 for every £2 of income above £100,000 |
|
Higher rate |
116,210 - 149,999 |
40 (32.5) |
|
|
Top rate |
150,000+ |
50 (42.5) |
|
Other key bands:
VAT registration limit and small business tax changes
From 2012/13 if self employed income exceeds £77,000 it may be necessary forto register for VAT.
Coming soon? From 2013, depending on government announcements this Autumn, we may see proposals for a simplied system for tax reporting will apply to businesses whose turnover does not exceed the VAT registration limit.
Join us on LinkedIn 
