Tax planning for company owners
Autumn 2009
Tax changes coming into effect from next year have added another layer of complication into planning for business owners. A new top rate of 50% income tax will be charged from 6 April 2010 on taxable income above £150,000. The top rate of tax on dividends will increase from 32.5% to 42.5%. Dividends, which are taxed as the top slice of income, come with a 10% tax credit, so the effective tax rate for dividends above the £150,000 limit in 2010/11 will be 36.11%, compared with a maximum rate of 25% in 2009/10.
The personal allowance will also be clawed back for people whose income exceeds £100,000: the allowance will be reduced by £1 for every £2 above the £100,000 limit. For example, if the personal allowance in 2010/11 is £6,800, it will be completely clawed back once someone’s income exceeds £113,600 (£6,800 x 2 + £100,000).
This means that the effective marginal rate on income that falls into the band between £100,000 and £113,600 will be 60% (higher rate of 40% plus an additional 20% from losing the personal allowance). The rate for dividend income will be 48.75%. Some straightforward tax planning may save you tax in the run-up to these changes.
Paying dividends now or later?
If your company has surplus cash, it could make sense to pay an interim dividend before the new top rate is introduced from 6 April 2010. The amount paid out as dividends can always be lent back to the company if necessary.
It is probably not worth paying a bonus instead of a dividend, because it is more expensive once national insurance contributions (NICs) are taken into account, even when the company is paying corporation tax at the main 28% rate.
Companies can only pay dividends out of accumulated profits. Therefore, if your company is currently making losses, it will only be able to pay dividends if it has accumulated reserves which cover the losses. Nevertheless, a reduction to a company’s capital can be made in some circumstances without having to obtain a court order, so it may be possible to turn an undistributable capital reserve into a distributable one. Ask us for details.
Pensions
Tax relief on pension contributions has effectively been restricted to basic rate for those with high incomes. People with incomes under £150,000 are not currently affected and should consider making the most of the opportunities to benefit from full tax relief while it is still available. If you are near this threshold, it may be worth trying to stay below it in some circumstances, for example by income shifting.
Income shifting
If you are a company owner and you are able to split your income with your spouse, partner or any other adult member of your family, and are not already doing so, then it may be worthwhile considering transferring some of your shares into their names. You can then distribute your company’s profits as dividends to take advantage of their lower tax bands in the future as well as their personal allowances, if available. Any capital gains can be held over or you may qualify for entrepreneurs' relief, which means you pay an effective tax rate of only 10%.
You cannot save tax by transferring shares to any unmarried children who are under 18, because income of more than £100 a year that derives from a gift of your shares will still be taxed as your own.
Family shares and PAYE and NICs
There should not be Pay As You Earn (PAYE) implications on
transferring some of your shares to your family. However, if you have family members who are also employees, it is normally not a good idea to create new classes of share for each family member. Following a recent court decision, it is possible that their future dividend income will be viewed as earnings and so could attract NICs.
