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Relief map

The new 45 per cent income tax rate announced in the pre-Budget report caused many a journalist to scurry for their pen, keyboard or dictating machine to pour out their hearts on the merits of investing in a registered pension scheme, including the apparently obvious opportunity for salary sacrifice with even greater tax and National Insurance benefits than under the current regime.

Well, I am not going to be any different, except to say that, of course, I am not a journalist.

Assuming higher-rate tax relief on pension contributions remains and that relief will be available where appropriate at the new highest rate, then the immediate appeal of such contributions and salary sacrifice to facilitate them will be heightened.

However, thought needs to be given to the timing. For example, if the contribution is made when relief is secured at 40 per cent but the emerging income is taxed at 45 per cent, then the tax attraction is still strong, given the greater sum invested as a result of the tax relief and the tax freedom of the underlying fund, but obviously somewhat diminished.

As the general election nears and the possibility grows of a Labour Government being re-elected, some people may be tempted to defer making contributions to obtain tax relief at the new highest rate, assuming that relief in excess of the basic rate on pension contributions is still with us. In this case, an investment into an Isa, offering tax-free growth with later tax-free removal, along with tax relief at the highest rate on the later contribution to a registered pension scheme, could be appealing to some.

However, those embarking on this course of action should factor in the possibility that relief on pension contributions in excess of basic rate cannot be guaranteed in a future world where tax revenues are likely to be in high demand, given the current levels of Government borrowing being embarked upon.

The freezing of the annual and lifetime allowance for five years from 2011 means that more people may be open to considering non-pension means of providing for future financial independence. This is something that I have considered in past articles.

There may be increased interest in the use of employee benefit trusts and family benefit trusts as a means of securing access to funds through loans from the trust without immediate income tax or NI cost.

However, HMRC action will need to be carefully monitored following the recent Sempra Metals case. I covered this in some detail in a recent series of articles.

For owner/managed companies that make money, there is always a decision to be made about how that money should be spent. The choices in principle are relatively straightforward – to retain funds in the company, usually by reinvesting in some way, or to restore the balance sheet. The latter course of action may be especially popular in the current climate of eroded asset values. Perhaps the first choice, as for individuals, is to repay debt with the consequent reduction or removal of the commitment to interest and capital repayments.

Of course, even where debt exists, some clients may resist repayment and so value access to funds more highly.

If the funds are not required in the company, for whatever purpose, the owner/manager will probably be looking to extract the funds for their own benefit with minimum tax and NI leakage. Not every firm will be cash-strapped, debt-ridden and with a desperate need to reinstate the balance sheet.

To the extent that funds removed would bear a 45 per cent tax rate (37.5 per cent on dividends) and NI on a salary or bonus payment, owner/managers may well see greater merit in reinvesting into their business. The sums reinvested will have borne only corporation tax, possibly at the small companies’ rate of 21 per cent, instead of income tax. If the value of the business is increased as a result of the reinvestment, then with the benefit of entrepreneurs’ relief, up to £1m of the gain eventually realised will effectively be taxed at 10 per cent, then at 18 per cent for any gains over this lifetime capital gains limit of £1m.

Despite the undoubted tax attraction of an effective 10 per cent tax rate on gains of up to £1m, there is an inherent risk in relying on one’s business as the sole source of financial security, however tax attractive that strategy may be.

Still on the company owner/ manager theme, the dividend versus salary decision will have been made even easier than it is now for those wishing to minimise the “outflow to the authorities” if the 45 per cent rate only applies to earnings. However, it would appear that the 45 per cent rate (37.5 per cent for dividends) will apply to all income, so that the dividend versus salary choice will remain as it is now, with the dividend having the often overwhelming advantage on tax and NI grounds.

The announced future increase in NI rates by 0.5 per cent for employers and employees in 2011 will tilt the balance even more in favour of dividends.

With so many companies having a calendar year end, now is an excellent time to schedule a pre-year end remuneration audit, taking account of the pre-Budget report proposals.


Interaction stations

Apparently, the FSA is unhappy at industry reaction to the RDR feedback statement. They appear to be suggesting that by not pleasing any particular sector, they have created an acceptable balance. Evidently, they choose not to consider the other possibility – that such antipathy denotes an awareness that the proposed actions cannot achieve the desired outcomes.

Fund companies set for consolidation

Ignis Asset Management sales and marketing director Jonathan Polin believes that a wave of consolidation will hit the asset management sector next year, with listed firms the most exposed.

Happy while you work

Well we’ve had scorching weather (yes even up here in Scotland!) and now the Euros 2016 are on – you can’t blame people for wishing life was just one big holiday.  With all these distractions it sometimes feels like work just gets in the way of having a good time! But sunny day skivers are […]


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