Accountancy
Reduce the 50% tax rate
According to the chancellor’s pre-Budget report, a new tax rate of 50% will be introduced for those earning over £150,000 a year. Martin Murray gives a few tips on how to reduce the impact
In April 2009, Alistair Darling announced that a 50% tax rate will be introduced for earnings greater than £150,000. This new rate will be implemented from April 2010 onwards. Personal allowances will be reduced for individuals earning in excess of £100,000 with total loss at earnings of more than £112,950.
In his pre-Budget report of 9th December 2009, it was anticipated that he would introduce anti-avoidance to prevent individuals or groups avoiding paying the 50% rate. This did not materialise. But there are various methods to reduce the impact of the new additional rate which can be used in isolation or in combination.
Methods
For example, a cosmetic doctor is employed by the NHS in addition to their own practice and has a spouse who has no outside employment. Let’s say the NHS employed income is £90,000 per annum and the cosmetic practice taxable profits are £120,000. In this scenario, the combined income is £210,000. The anticipated additional tax payable after loss of personal allowances and the 50% rate of tax is £8,600.
If a salary of £25,000 is paid to the spouse, the additional tax liability is reduced by nearly £5,500. Associated costs of setting up a PAYE scheme are only around £250 per annum. A salary of £15,000 could be paid with a pension contribution for the spouse of £10,000 (gross). If the latter combination is paid, the additional tax of £8,600 is extinguished. The pension contribution would receive tax and national insurance relief at 51%!
A partnership arrangement with the spouse could be established—even with an 80/20 split, over £7,000 of the additional liability is extinguished. This would mean an inexpensive change to the accounts and two additional tax returns: one for the spouse and one for the new partnership. Additional accountancy fees would be incurred.
If a limited company is set up and the spouse is a co-shareholder on an 80/20 split, additional tax is extinguished. But this is more complicated as there may be a deemed cessation of the cosmetic practice that, dependent on the year end, may accelerate tax liabilities.
Accounts complying with the Companies Act also need to be prepared. This is in addition to a corporation tax return and individual tax returns. The fees may be much higher than those presently paid.If the financial year end of the cosmetic practice does not coincide with the 5th April or 31st March, consider changing to one of these dates. The downside is that it may accelerate tax liabilities but at a lower rate of say 40% as opposed to 50%. Some evidence of spouse participation may be required should the revenue make enquiries.
There may be cases where you cannot use the spouse because he or she has outside employment with restrictions in their employment contracts or there is no spouse or suitable alternative. In this case, the following route can be considered.
It may be possible to split the cosmetic practice so that part of it is encapsulated within a limited company with the remaining practice operating as before.
The split may be on some geographical basis, in respect of the nature or source of referrals or even by type of procedure—there has to be some logic as to the apportionment. This method is only relevant if not all the income earned is needed. The company is, in effect, a deferral vehicle and potential savings may be lost if the income is taken via a salary or dividend.
Pensions
New rules relating to the amount of tax relief available on pension contributions will be introduced from April 2011. These rules affect individuals with earnings in excess of £150,000 and take into account NHS pension contributions, including the employer’s contributions. The new rules are still subject to consultation but if implemented would represent a draconian move against high earners with pension contributions.
Using the spouse by way of an employee, partner or co-shareholder or even a limited company in combination with the existing private practice is a way to mitigate or extinguish the impact. This should be discussed with your own accountant.
It is widely accepted that the recent pre-Budget report did not dispense the pills to cure the country’s financial woes. As a consequence, the Budget following the next General Election will set out the next Government’s action plan for the foreseeable future.
In addition to cuts in public expenditure, further tax increases either directly or by some other means may be implemented. If this does happen then some of the planning detailed above will need revision.
Martin Murray is a partner at Sandison Easson & Co, a specialist medical chartered accountancy firm with offices in London and Cheshire. Tel: 01625 527 351; 0207 307 8759; E: info@sandisoneasson.co.uk; W: sandisoneasson.co.uk
