How to avoid the 50% tax band
With a proposed top rate tax of 50% towering over the futures of UK businesses, British Franchise Association Affiliated accountants Morris & Co provide tips on how to defer and avoid the government slicing your income in half
If you are a successful franchisor or franchise owner then from April 2010 if your annual income is over £150,000 you bear the brunt of the proposed income tax increases. It is a huge 25 per cent increase - from 40 per cent to 50 per cent - in the top rate of tax on your earnings and savings income.
The rate at which your gross dividends are taxed will also rise from 32.5 per cent to 42.5 per cent - a whopping increase of 44.4 per cent in the effective rate on your net dividends (from 25 per cent to 36.1 per cent)!
What can directors, employees, shareholders, sole traders and partners do to soften the blow? In the first instance, it may be possible to delay the effect of the changes by up to a year. Secondly, more fundamental action could avoid some or all future profits being subjected to the 50 per cent rate. However before taking action take advice from a specialist firm of franchise accountants.
How can the effect of the changes be delayed?
Here are some ideas which would all result in income being taxed at 40 per cent in 2009/10 rather than 50 per cent in 2010/11:
- Franchise businesses could consider bringing forward the date of a bonus payment to directors or employees (for example, from May 2010 to March 2010).
- Similarly, franchise companies could consider bringing forward the date of a dividend payment to before 6th April 2010. If necessary, funds could be loaned back to the franchise company.
- If directors or employees are holding share options that will result in an income tax liability, they could consider taking these before 6th April 2010.
- Sole traders and partnerships could consider changing their year end (for example, from 30th April 2010 to 31st March 2010). Overlap relief could substantially reduce profits (or even create a loss). However, a change would bring forward the time at which tax would be payable on future profits.
For the Future
Going forward, here are some suggestions on how the 50 per cent rate could be avoided on profits or personal income in future years (again you should take advice from specialist franchise accountants):
- It was thought that the new top tax rate could lead to more sole traders and partnerships (including limited liability partnerships, LLPs) considering incorporation. However, if all profits are distributed, the limited company route will only be more tax-efficient if the small companies corporation tax rate applies. In that case, the overall effective tax and national insurance rate for 2010/11 will be 49.53 per cent where all profits are distributed by dividends, compared with 51 per cent for unincorporated businesses.
- If you operate as a sole trader or partnership with large payroll or other service costs you could consider using a limited company to administer and pay these costs for a fee which would escape the 50 per cent rate. There is of course a limit on the level of fee that can be charged without HMRC raising questions.
- Partnerships (including LLPs) could consider admitting a corporate partner. The corporate member's profit share would be taxed at a lower rate, and it could also provide services to the LLP. This route is likely to offer more scope and flexibility than with a simple service company. However, care would be required if there was a possibility of losses arising, as loss relief for corporate partners may be restricted.
- Franchise companies could simply retain surplus funds instead of immediately distributing these to be taxed at higher rates in the recipients' hands.
The content of this article is for information purposes only and should not form the basis of any decision as to a particular course of action. No responsibility can be taken by Morris & Co for the accuracy of the information contained in this article or for loss incurred in acting or failing to act as a result of information contained in this article. This article does not constitute legal, accountancy or regulatory advice. Specialist advice should be sought in relation to your own circumstances.