A 50% top rate of income tax will apply to those with a taxable income of £150,000 or more from 2010/11.
In addition, from 2011/12 the personal allowance will potentially also be reduced by £1 for every £2 of income over £100,000, see Tax rates and allowances. This produces a marginal tax rate of 60% for someone whose income falls into the band £100,000 to £113,000.
In 2011/12 a restriction on pensions tax relief is introduced to prevent most individuals with earning in excess of £130,000 from obtaining 50% tax relief on personal or employee and employer pension contributions. A complicated taper system reduces tax relief so that it restricted to 20% when earning are £180,000 or more, see Pensions tax planning.
In 2011/12 National Insurance also increases by 1%. This will also apply to employer contributions, see Tax rates and allowances.
How to avoid paying tax at 50% (60% in some cases)
- Rearrange your income producing assets to use up lower tax rate band of spouse, partner or family, see Shifting your income to save tax.
- Dissolve an existing company to distribute assets as capital, see Companies: ceasing trading.
- Will a flexible trading structure allow remuneration and benefits planning to avoid marginal tax rates? See Will I pay less tax if I trade via a partnership?
- Maximise tax-free and tax-efficient benefits see Tax-free benefits in kind and perks.
- Consider a salary sacrifice arrangement to increase employer pension contributions when your employee's income is going to fall into the £100,000 to £113,000 band in 2011/12; he will otherwise be paying a marginal rate of tax of 60% when his personal allowance starts being restricted.
- A salary sacrifice will not be effective for keeping income below the pensions restriction floor of £130,000, see Pensions planning if it is made for that purpose on or after 9 December 2009.
- Employers: now is time to think about share schemes and share option schemes.
- Consider making discretionary bonus awards to employees of non-taxable benefits. This is not going to be effective for contractural bonus incentives, but can be one way of introducing a work's canteen (employer subsidised lunch) if you missed setting one up via a salary sacrifice arrangement before 5 April 2011, see salary sacrifice arrangement for a fuller discussion as this will save employers NICs too.
- You also need to look at the various options (salary or dividend?) which are considered in the section Tax planning for directors; and note the summary in Will I pay less tax if I trade via a partnership?
- Review your investments and deposits to accelerate income and interest where possible, and change income producing products into those which will see capital growth instead, see Private Client: tax planning for the 2009/10 year-end.
