Insights

Since their introduction by Alastair Darling, the 50% tax rate and abatement of personal allowances have been the subject of endless controversy.  Tax calculations show that some people earning between £100,001 and £113,000 are actually paying 60% due to the erosion of their personal tax allowance.

 
At the end of March, Deputy Prime Minister Nick Clegg pretty much confirmed the Coalition’s intention to scrap the top tax rate, which is likely to occur in the 2013 budget.  According to the Office of Budget Responsibility, there is growing evidence that people are going to great lengths to avoid paying it.

 
Instead Clegg hinted at plans to tax high value properties in order to counter Treasury income that might be lost after the cut.  He said the Coalition aspired to: “A liberal tax system (that) rewards work and enterprise and captures pollution and unearned wealth.”

 
What opportunities exist for taxpayers affected by the 50% rate to shelter some of their earnings between now and 2013?

Tax planning tip #1 - Invest in EIS

After the changes introduced in the recent Budget, EIS or Enterprise Investment Schemes have become more valuable than ever.  If you have the resources to make an investment in a qualifying EIS company, you will (subject to meeting the necessary criteria) qualify for initial income tax relief of 30% of the amount invested.  This means if you invest £100,000 in a qualifying company, you immediately benefit from an income tax deduction of £30,000.

Shares that qualified for EIS income tax relief on issue are also exempt from capital gains tax on disposal.  Under a separate part of the EIS scheme, previous capital gains can be deferred by investing the proceeds into an EIS company.

From April 2012, the investment limit will rise from £500,000 to £1million and investments will become more attractive because of the size restrictions for companies qualifying for the scheme being raised.  Whereas in the past it was only open to smaller (and inherently more risky) businesses, now those with up to 250 employees and assets of £15million in assets are now eligible for inclusion.

 
The general qualifying criteria for individuals to obtain EIS tax relief are:
• Shares must be ordinary shares with no preferred rights;

• The investor must hold the shares for at least three years;

• The investor may not hold a stake of over 30% in the issuing company either alone or together with associates. This is measured either by share capital, share capital and loan capital combined, or voting rights;

• The investor must not be employed by the issuing company, subject to an exception for certain paid directors.

• A recent tribunal case indicated that for situations where an MBO gives rise to a new company, EIS relief may be possible to obtain.

 
Tax planning tip #2 - Shelter income in a Limited Company

One of the benefits of incorporating a business is the flexibility it offers shareholders over when they take their income and the forms it can take.  If you have the potential to shelter income in your company rather than automatically being taxed on profits as a sole trader or partner, or indeed drawing income from your company, it could be tax efficient to do so.  By deferring the taking of income it could be tax efficient because you would pay tax at the future (likely to be lower than 50%) rate.

 
Tax planning tip #3 - Pension contributions

Starting from 5 April 2011, it is now possible to make an annual pension contribution of £50,000 which, although much lower than the previous £250,000 sum, is still an attractive option for tax planning purposes.  And let’s face it, how many people could afford the former maximum each year!

 
Therefore, if the possibility exists to defer remuneration, it is possible to significantly reduce one’s tax liabilities in the short and longer term.