Is the 50% income tax rate on high earners a temporary measure?
The 50 per cent top rate of income tax is widely expected to be reduced in coming years. So if you have just completed your 2010/11 tax return to discover that some of your income is now being taxed at 50% then now is the time to take action to avoid this in future years.
In this year’s Budget, in March, George Osborne, chancellor, confirmed that the 50 per cent rate would still apply to earnings above £150,000 in the next tax year – but stressed that it was as a “temporary” measure. Many commentators suggest it could be abolished as early as 2013.
The tax saving options available include deferring some income until a later tax year, when the top rate may be been reduced, or taking full advantage of 50 per cent tax relief while it is available. Here are 5 tips for reducing 50 per cent tax:
1. Use your spouse’s allowances
Taxpayers in the 50 per cent tax bracket can transfer income-producing assets into the name of a spouse in a lower tax bracket, and keep both their incomes below the threshold.
2. Defer dividends or salary
Business owners could defer paying themselves dividend and salary until the tax rate falls, provided they don’t need the income.
3. Company loans
If business owners do require more income, they can take a loan from the company. These are arranged so as to be paid off via a dividend or bonus declared when – the tax rate will have reduced to 40 per cent. If these loans are properly timed, the tax payable on them is small compared to the potential tax saving.
4. Give the family a pay rise
One option for the family business is to boost the income of family members in lower tax brackets. But owners need to be able to justify these pay rises in terms of increased responsibility or hours.
5. Share in the family company
Alternatively, spread share ownership more widely between family members enabling dividends to be voted to individuals who are lower rate taxpayers.
With all of these tips the key is to take action in the early part of a tax year (i.e. now if not before) otherwise the opportunity to save tax will be missed.
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