WITH total tax receipts falling, it is perhaps no surprise that a new 50% tax rate has been announced. We have not seen an increase in the highest rate of income tax for some 20 years, when it was reduced from 60%!
A number of changes have already been announced to income tax rates and personal allowances from 6th April 2010.
For individuals with incomes over £100,000 per annum, the personal allowance will be reduced by £1 for every £2 of net income over £100,000. Net income takes account of losses, pension payments and allowable contributions to charity.
Although the level of personal allowance is not yet announced for 2010-2011, the effect of this is likely to be that the basic personal allowance will be reduced to nil for net incomes over approximately £113,000 a year, which equates to a 60% tax rate on income falling in that band.
For individuals with incomes over £150,000 per year, a 50% tax rate will apply to taxable non-dividend income above £150,000 per year (currently 40%). A 42.5% dividend tax rate will apply where taxable income is over £150,000 a year (currently 32.5%). Taking into account dividend tax credits, this means that the effective dividend tax rate will increase from 25% to approximately 36%.
Whether this rate will be reduced in the future will no doubt depend on the economic climate and the tax policies of the incumbent Government.
Temporary first year allowances
In most cases, the first £50,000 of qualifying expenditure on general plant and machinery in a year will already qualify for the 100% annual investment allowance.
Expenditure in excess of this amount would normally be allocated to the main pool and qualify for a 20% writing down allowance. However, for the 2009-10 tax year such expenditure by companies, individuals and partnerships will now qualify for a temporary 40% first year allowance.
Enhanced capital allowances
New measures are being introduced to revise the lists of technologies covered by the enhanced capital allowances (ECA) scheme which allows 100% relief for the cost of purchasing designated plant and machinery that is energy saving or water efficient.
Capital allowances on cars
The completely new system for capital allowances on cars announced in the PreBudget Report in November came into effect from 6th April 2009 (1st April for companies). Cars purchased before April 2009 will continue to be covered by the old system for a five-year transitional period, but capital allowances on cars purchased from April 2009 will be taxed on their CO2 emissions.
Under the new rules, cars with CO2 emissions of up to 160g/km will qualify for a 20% writing down allowance, with those over only attracting a 10% writing down allowance.
The 100% capital allowance for low emission cars continues to be available. These are cars with CO2 emissions up to 110g/km.
Prior to April 2009, the definition of a car for capital allowances included motorbikes, but those purchased from that date will now qualify as plant. They will therefore be eligible for the 100% annual investment allowance mentioned above.
Corporation tax rates
The Government has confirmed that the main rate of corporation tax will remain at 28% until at least 31st March 2011. The small companies’ rate will remain at 21% until at least 31st March 2010.
Planning
With these changes, effective tax planning becomes a priority, particularly for partnerships. Some initiatives which can be considered are:
• Maximising personal expenses (justified/reasonable).
• Reviewing total personal/business borrowings to ensure that relief for interest paid is maximised.
• Use of spouse allowances and lower rate tax bands.
• Use of tax-efficient investments.
• Planning the timing of both personal and partnership expenditure.
These are just a few ideas which may be appropriate. There are many more that can be considered to suit individual circumstances.
In order to mitigate the effects of the 50% tax rate, and perhaps more importantly the 60% rate for earnings between £100,000 and £113,000, tax planning will be essential.
Change of year end
Another area which can be considered is the choice of practice year end. Changing a partnership year end can accelerate taxable profits to an earlier tax year.
The advantage of this is to avoid a 50% rate on some of the partnership profits. The disadvantage is the acceleration of the tax payments to be made to HM Revenue & Customs.
This is not a straightforward matter. The decision on year end will be different for each practice, as it will depend on specific circumstances, e.g. profit levels/overlap profits/part-time partners, retiring partners, and so forth. Whatever the circumstances of the partnership, this issue should not be ignored.
Business structures
Many veterinary practices trade through a partnership structure and now may be a good time to consider the use of a limited company. This may not be appropriate for all of your trading activities, but for some income streams it may be beneficial.
Limited companies currently pay corporation tax at 21%-29.75% depending on taxable profit levels, so the lower tax rate may be attractive. However, before setting up a limited company, consideration would need to be given to profit extraction from the company and the personal tax implications of doing so, to ensure that the limited company structure would be advantageous from a tax perspective.
There are a number of non-tax issues which would need to be considered as part of this process. It should be remembered, of course, that the majority of the issues regarding incorporation which were covered in previous articles should be considered, including where to hold the property and how benefits are treated.
Consideration could also be given to a limited liability partnership either as an alternative or in conjunction with a limited company.
Pension contributions
For individuals with incomes of more than £150,000 each year, higher rate pension tax relief is to be reduced from April 2011 on a sliding scale which will mean that for those with incomes of £180,000 or more, tax relief will only be available at 20%.
This is combined with anti-forestalling measures which might, depending on the amount and frequency of contributions, limit the higher rate tax relief on pension payments made in 2009-10 and 201011.
• Copies of previous articles can be obtained from marilyn.martin@uk.pkf.com.