Taxing times for high earners

Taxing times for high earners


With the backdrop of global economic turmoil and deteriorating public finances, the 2009 Budget included a number of measures to increase tax revenues going forward. The most publicised changes affect high earners, both in terms of the tax they pay and the tax relief they receive.

In November’s Pre-Budget Report the Chancellor announced a new top rate of tax of 45% would be introduced from 6 April 2011. However, the 2009 Budget took this a step further by increasing the proposed top rate to 50% and bringing the introduction forward to 6 April 2010.

The difference in effective tax rates between high and low earners and between income tax and capital gains tax (CGT) will provide further incentive for tax planning between spouses/civil partners and encourage individuals to utilise existing allowances.

The changes will also potentially increase the attractiveness of investing in assets producing capital gains (the CGT rate is currently 18%) rather than income.

Budget for change

With effect from 6 April 2010, there will be an additional higher rate of tax of 50% for taxable income above £150,000. Income (excluding dividends) in excess of the personal allowance and up to the basic rate band will continue to be taxed at 20% and income between the basic rate band and £150,000 will be taxed at 40%.

Dividends otherwise taxable at this new 50% rate will be taxed at a new rate of 42.5%. Trusts have not escaped these changes either. The dividend trust rate will be increased to 42.5% and the trust rate will also be increased to 50%.

Furthermore, the higher rates of tax will be coupled with the withdrawal of the personal allowance for those individuals who have adjusted net income in excess of £100,000. From 6 April 2010, the personal allowance (£6,475 for 2009/10) will be reduced by £1 for every £2 of adjusted net income over £100,000. Therefore, individuals with adjusted net income in excess of approximately £113,000 will no longer benefit from any personal allowance. This represents an effective tax rate of 60% on income between £100,000 and £113,000.

For employees and self-employed individuals, the tax burden will be further increased in April 2011 when the increased National Insurance rates come into effect.

Planning points

These changes further highlight the importance of tax planning. For example, it is still possible for individuals to gift income producing assets to spouses/civil partners (on a no gain/no loss basis) who have a marginal rate of tax lower than their own.

And individuals who are self-employed may also revisit the question of whether or not they should incorporate. Individuals who incorporate may have some discretion over whether profits are extracted in the form of a salary or bonus or if they are extracted by way of dividends. For dividend income received in excess of £150,000, the effective rate of tax is 36.1%, which represents a tax saving of 13.9% when compared to the corresponding tax rate applied to a salary.

Mansworth v Jelley – HMRC change of view

But it’s not only the Budget that throws up changes to the UK tax system. In May 2009, HM Revenue & Customs revised its previous guidance on how to calculate the allowable loss on the disposal of shares that are acquired on the exercise of share options, prior to 10 April 2003. This was following the Mansworth v Jelley (M v J) case.*

This new guidance could potentially have significant implications for individuals who had previously established large capital losses following the M v J case and which now might not be available.

What next

As always, individuals should seek bespoke tax advice to ascertain how the Budget changes and revised M v J guidance affects them.

Given the current climate of increasing tax rates and low deposit rates, it is vital that individuals ensure assets are held as tax efficiently as possible and that they are fully utilising all the allowances and reliefs available to them.

Coutts have a dedicated tax team that look after the personal tax affairs of many Coutts clients. Our specialists can assist with a range of services, including the preparation of a client’s tax return or bespoke tax advice on a personal tax issue.

Please click here, for more details on Coutts tax services.

*When the Court of Appeal decision changed the way in which the base cost was computed for shares which had been acquired on the exercise of an unapproved option.