Act Now to Escape the 10% Increase in Tax.

 

From 6th April 2010, a new 50% income tax rate comes into effect for anyone earning £150,000 per annum or more.  A new top rate dividend tax of 42.5% will also apply above this threshold.  This seems bad enough, but there is a further sting for those earning more than £100,000 per annum!
 
If your income exceeds £100,000 per annum after 6th April 2010, your basic personal allowance will be withdrawn at the rate of £1 for each £2 your income exceeds £100,000.  What this means is that you will lose your allowance completely when your income exceeds £112,950 (2 times the personal allowance of £6,475).  As you will be taxed at 40% on income between £100,000 and £112,950 whilst progressively losing your personal allowance, the marginal rate of tax on this £12,950 is 60%!
 
You may wish to consider these impending tax changes from two different standpoints:-
 
1.      If possible accelerate your dividend payments or bonuses so that they are paid to you before 6th April 2010, allowing you to take advantage of the existing 40% tax rate with no loss of your personal allowance.  You may need to plan your business cash flow to achieve this but you could save as much as £7,770 in tax on a bonus of £12,950 if your income has already exceeded £100,000 for the year.
 
2.      From a different perspective you may wish to devise a strategy to keep your taxable income below £100,000 in 2010-11.  Remember that capital gains tax remains at 18% for 2010-11 so if you can replace income with a capital gain, you may be able to save a significant amount of tax.
 
If you would like to discuss your own tax affairs in the light of these impending changes, please contact us as soon as possible.