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Business Tax  •  Personal tax  •  Personal Taxation  •  Share Schemes  •  Taxation

Tax planning for £100K plus earners and tax efficient gift ideas

By RJP LLP on 9 December 2010

With Christmas almost upon us, you may be looking for some alternative gift ideas.  Here at RJP, the Surrey based tax specialists, we've put together a Christmas wish list which see you through well into January and tax return time!

In addition to considering tax efficient investments such as EIS, what else could you implement between now and the end of the tax year to minimise your 2010/11 tax liability? We have compiled a number of key tips below based around some of the most common things we see clients fail to do in order to reduce their tax liabilities.

1. Use up all your annual allowances: for ISAs this is £10,200, split between shares and savings, and for CGT it is £10,100.

2. Make pension contributions: from next year it will be possible to pay up to £50,000 into a personal pension and obtain tax relief at the maximum amount you are paying. For now, you are in theory still entitled to make a large one off payment, but the rules governing this have become quite complicated, so if you are in a position to make a large contribution, it is worth seeking advice about what is allowable to ensure you maximise your tax savings and do not inadvertently incur a tax liability.

3. Take a salary to the value of your personal allowance: this sounds more obvious than the two suggestions above, but it is surprising how many business owners receive 100% of their remuneration as dividends. This isn’t the most tax efficient option, especially if your total earnings can reach six figures.

Reduce income out of the 100K-113K bracket
Total income levels falling with the £100,000 to £113,000 range are the most ineffective income levels for tax purposes since the effective tax rate increases to 62%. The reason for this is that those within this range are losing £1 of their personal allowance for every £2 over £100,000 they earn. If you have total income within this range, our advice is to try and reduce it to £100,000.

You can for example avoid this extra tax by increasing pension contributions to reduce your income below £100,000. This is very effective because for example, paying £10,000 into a pension and thereby reducing income from £110,000 to £100,000 results in 62% tax relief on the pension contribution. There are other opportunities to reduce taxable income levels such as gift aid contributions.
Tax efficient gift options
With Christmas almost upon us as well as the tax year-end, it’s also timely to consider tax efficient gift options for loyal staff members. Whilst the level of gift on which tax relief is available is limited, the relief is especially useful in reducing tax liabilities for higher rate taxpayers.
Tax relief is available for gifts made to reward long standing employees – this is a little known relief and can be useful both in reducing tax liabilities and as an alternative where there are restrictions on offering pay increases in the current climate. And note; if you are reading this and you are a director of an owner managed business, or consultant running a small limited company in which you are the sole, long standing employee, this opportunity applies equally to you.

What are the eligibility criteria? HMRC says that depending on the individual circumstances of each employee, a long service award may be exempt from tax provided the award marks a period of not less than 20 years service with the same employer, is not made within 10 years of a previous gift, and must be something other than money. Holidays, cars and jewellery are all allowable, provided the taxable value of the award does not exceed £50 for each year of service.

If an award does not satisfy HMRC’s conditions, or is greater than the £50 limit, employers can pay the tax due under a PAYE Settlement Agreement on the excess value. Note, cash awards do not qualify for exemption at all and are taxed through the PAYE system.

The example below illustrates how tax relief can be applied to different gifts made to the same person as they complete their years of service with the same company:

  • After 20 years service, an item costing £1,000
  • After 30 years service, a further item costing £500
  • After 35 years service, a further item costing £625
  • After 40 years service, a further item costing £1,000.

Exemptions are calculated as follows:

  • The 20 year award is not taxed. This is the first award received; the 20 year condition is satisfied, and the cost does not exceed £50 for each year of service (20 x £50 = £1,000). If the item had cost £1,500, tax would have been charged on the excess over £1,000.
  • The 30 year award is not taxed. It satisfies the conditions for exemption and it does not matter that the employee has already received a tax-free award.
  • The 35 year award is taxed in full. It is within the monetary limit (35 x £50 = £1,750), but no exemption is due because the employee received a similar award within the previous 10 years.
  • The 40 year award is taxed in full. It is within the monetary limit (40 x £50 = £2,000), but no exemption is due because the employee received a similar award within the previous 10 years. The 35 year award is counted even though it was taxed in full.

Tax planning meetings
There are a number of tax planning options available to higher income earners looking to reduce their liabilities. During February and March 2011 only, Robert James Partnership is offering fixed price meetings to either high net worth individuals or companies seeking to offer this advice to staff earning in excess of £100,000. The cost of these meetings is £250 and they will be available for a limited period on a first come first served basis.
Contact Lesley Stalker or Paul Webb for further details.

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