A 50% top rate of income tax will apply to those with a taxable income of £150,000 or more from 2010/11.
In addition, from 2011/12 the personal allowance will potentially also be reduced by £1 for every £2 of income over £100,000, see Tax rates and allowances. This produces a marginal tax rate of 60% for someone whose income falls into the band £100,000 to £113,000.
In 2011/12 a restriction on pensions tax relief is introduced to prevent most individuals from obtaining 50% tax relief on personal or employee and employer pension contributions, tapering down to reduce tax relief for those with income of £180,000 or more to 20%, see Pensions tax planning.
In 2011/12 National Insurance also increases by 1%. This will also apply to employer contributions, see Tax rates and allowances.
How to avoid paying tax at 50% (60% in some cases)
- If possible, rearrange your income producing assets so that you can shift income to your spouse, partner or family, see Shifting your income to save tax.
- Consider liquidating your existing company, so that its assets can be distributed as capital. The cheaper version is to dissolve the company, however it depends on the complexities of your existing arrangements; you may need to consider a capital reduction, see Companies: ceasing trading.
- If you are hitting higher rates of tax and you want a flexible trading structure, you may be better off trading via a partnership. It does depend on the level of profits a business generates and how flexible you can be in terms of your remuneration and benefits planning, see Will I pay less tax if I trade via a partnership?
- Maximise tax-free and tax-efficient benefits, this speaks for itself, see Tax-free benefits in kind and perks.
- Consider a salary sacrifice arrangement to increase employer pension contributions when your employee's income is going to fall into the £100,000 to £113,000 band in 2011/12; he will otherwise be paying a marginal rate of tax of 60% when his personal allowance starts being restricted. A salary sacrifice will not be effective for keeping income below the pensions restriction floor of £130,000, see Pensions planning if it is made for that purpose on or after 9 December 2009.
- Consider making discretionary bonus awards to employees of non-taxable benefits. This is not going to be effective for contractural bonus incentives, but can be one way of introducing a work's canteen (employer subsidised lunch) if you missed setting one up via a salary sacrifice arrangement before 5 April 2011, see salary sacrifice arrangement for a fuller discussion as this will save employers NICs too.
- You also need to look at the various options (salary or dividend?) which are considered in the section Tax planning for directors; and note the summary in Will I pay less tax if I trade via a partnership?