The new top tax rates: reducing the impact

Although the new 50% and 42.5% top tax rates are not effective until 6 April 2010, you may already have earned income which is going to be taxed at those rates – for example:

• self-employed profits for accounting periods ending on/after 6 April 2010 (50%)
• company profits to be distributed by dividends/bonuses payable after 5 April 2010 (42.5/50%).

There is a limited number of ways to reduce the impact for those whose taxable income will exceed £150,000 in 2010/11. Amongst them are:

• accelerating income into the 2009/10 tax year by paying dividends/bonuses earlier
• a change of accounting date for a self-employed business to shift profits into 2009/10
• forms of salary sacrifice where there is a saving to be made by replacing salary with certain benefits-in-kind.

Any of these may mean that income shifts to a lower tax rate, but they may also mean that additional cash must be found, either to withdraw from the business (for example as dividends, though the money could be loaned back) or to pay the tax.

A change of accounting date for a self-employed business will typically mean that profits are taxed sooner, so the advantage of a significant delay between earning profits and paying tax will be lost.

We can help you plan to minimise the impact of the new tax rates – please contact us for more information.