Tax planning for company owners
A new 50% income tax rate will be charged from 6 April 2010 on taxable income above £150,000. The top rate of tax on dividends will correspondingly increase from 32.5% to 42.5%.
The personal allowance will also be clawed back for people whose income exceeds £100,000. The amount of the allowance will be reduced by £1 for every £2 above the £100,000 limit. The effective marginal rate on income that falls in 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. Cash can always be lent back to the company afterwards.
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. 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 dividend income with your spouse, a partner or any other adult member of your family, it may be worthwhile considering the transfer of 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, if available.
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 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.