Top Tax Tips for High Earners

What is a high earner?

There are a few ‘stages’ at which we tax advisers may consider an individual to be a ‘high earner’ and these stages arise because there are a certain levels at which tax planning opportunities arise specifically because of a person’s income. 

For example – a person may be regarded as a high earner when they are earning £60,000 or more as at this level any entitlement to Child Benefit will be lost.

For those earning just above £100,000 this is where entitlement to the tax free allowance starts to be withdrawn. 

And anyone earning over £150,000 is subject to the top rate of tax of 45%.

In all cases these are people who would benefit from taking measures to reduce their relevant income.

Top Tips

I will talk you through 4 top tips which are designed to be easy for you to take the initiative with. I will not go into the use of Trusts (which can be a very useful area for High Net Worth individuals) as this is an area which requires detailed and personalised professional advice.

1: Income Equalisation

Where a high earner is married to or in a civil partnership with someone who either does not work or who is not a higher rate or top rate tax payer there are potential savings to make. 

The higher earning spouse may shift income over to the lower earning spouse to make sure that all personal allowances and basic rate bands are fully utilised. This can be a particularly lucrative tip as the actual transfers of assets or cash to spouses themselves are exempt from tax. 

Popular assets to transfer include income bearing investments (i.e. money held in savings accounts), dividend bearing shares and rental properties. 

2: Gift Aid

It seems to be easily forgotten but gift aid, donating to charities, can be a very tax efficient thing to do.

A top rate tax payer can save 30% of the gross donation in tax, so it is important that you tell your adviser about any charitable giving you have been doing during the year.  In real terms that’s £30 of saved tax for an £80 donation... 

Gift Aided donations also reduce ‘Net Relevant Income’ which is used when calculating entitlement to Child Benefit and Personal Allowances. 

There are a few ‘rules’ which make the donations eligible for these reliefs but it’s very easy to qualify and your adviser should be able to talk you though it. 

3: Make Sure You Declare Everything

A common mistake I find is that people feel that Self Assessment is just for people to declare their trading income, or perhaps if they’ve had a special investment mature but actually it is  designed to collect information on all of a taxpayer’s income, not just income from business sources. Bank interest from all accounts (but not ISAs) must be shown on the tax return as must all employment income, rental income and expenses and dividend income. Various institutions send HMRC your income details each year and if there is a discrepancy then HMRC may raise an enquiry. 

Dealing with an enquiry and paying the associated fines for not declaring all of your income is not only stressful but can also be costly. 

4: Plan Ahead

Whether you are thinking of investing or selling an investment it is a good idea to speak to an adviser first. 

Something as simple as the date of making an investment can have a huge effect on the amount of tax you pay – and likewise, the date of selling an investment can see your tax bill go from £££ to zero. 

It is tempting to leave planning as an after thought but it really can save you big money. Find an adviser you feel comfortable speaking to and who is easy to contact and then utilise them!

For further information/advice please contact Robyn Milstead on 01932 830664 or email: robyn.milstead@wardwilliams.co.uk

Budget 2013 - Aspiration Nation!

The Chancellor delivered his 2013 Budget for an “aspiration nation” on 20 March 2013.

George Osborne announced tax cuts to help voters with the spiralling cost of living and tax breaks to benefit businesses and promote the UK as “the place” to start and grow business in Europe.

The Autumn Statement and previous announcements largely removed the surprise factor from the Budget, such as the drop in the additional rate of income tax to 45%, a step towards unifying the main rate and small profits rate of corporation tax, a cap on income tax reliefs and the introduction of a new statutory residence test.  The Budget merely accelerated or stalled what we already knew, as opposed to excite and inspire what we didn’t.

Below sets out the key data of the tax highlights from the 2013 Budget:

Personal allowance – the tax-free allowance will increase to £10,000 from April 2014.

Corporation tax – a single rate of 20% for companies from April 2015.

Employment Allowance – a £2,000 allowance for businesses to set against their employer national insurance contributions from April 2014.

State pension reforms – a single-tier state pension of £144 per week will be introduced from 2016.

Pension allowances – the annual allowance for pension contributions will reduce from £50,000 to £40,000 as from 2014/15.

Childcare scheme – a new tax-free childcare scheme, worth up to £1,200 for each child, to be phased in from autumn 2015.

Mortgage lending – a government backed “help to buy” scheme to guarantee up to £130bn of home loans to assist house buyers who cannot afford a large deposit.

Seed Enterprise Investment Scheme – a one year extension of capital gains tax reinvestment relief.

If you wish to discuss any issues concerning the Budget please feel free to contact:

(Uxbridge office):   Simon Boxall,   t: 01895 236335, e: simon.boxall@wardwilliams.co.uk  

(Weybridge office):   Sarah Brock,  t: 01932 830664, e: sarah.brock@wardwilliams.co.uk

(Sunninghill office):  Kath van Eyken,  t: 01344 624114, e: kath.vaneyken@wardwilliams.co.uk  

Spring 2013 Budget Summary

Budget Highlights:

Personal allowance increased to £10,000 in 2014/15 and the higher rate threshold increased by £415 to £41,865.

A new tax-free childcare scheme, phased in from autumn 2015, to provide 20% of childcare costs up to £6,000 per child per year, for children under age 12.

The new single-tier state pension to be introduced from April 2016.

A £2,000 Employment Allowance for businesses and charities to set against their employer national insurance contributions from April 2014

A single rate of corporation tax of 20% for companies from April 2015.

Stamp duty to be abolished for shares listed on exchanges such as AIM from April 2014.

A limited one year extension of capital gains tax reinvestment relief for Seed Enterprise Investment Schemes.

A package of measures to increase the supply of low-deposit mortgages for credit-worthy households including a government-backed mortgage guarantee scheme from January 2014.

A raft of specific anti-avoidance measures alongside the new General Anti-Abuse Rule (GAAR)....

Click here for the full summary

The UK - Tax haven for group holding companies?

A few years ago it was normal for UK-based groups to hold their overseas subsidiaries through a holding company located in a territory (for example the Netherlands) which operates a participation exemption for foreign dividends and capital gains whilst also having a good network of double tax treaties that reduces or eliminates withholding taxes.  However, recent reforms of UK taxation, brought about partly by the Government’s desire to make the UK more competitive as well as a result of EU tax rules, now mean that the UK is in a competitive position as the choice of location for a group holding company.

• The first of the reforms was the introduction of a corporate tax exemption for most types of incoming foreign dividends effective from 1 July 2009 (with differing rules and conditions applying to small and non-small enterprises) regardless of the size of the shareholding.

• For UK companies doing business abroad through foreign branches rather than foreign subsidiaries, an election can now be made for the company’s overseas permanent establishments (PEs) to be exempted from corporation tax.  Such an election, once made, is irrevocable and must apply to all the company’s foreign PEs wherever located.  (The quid pro quo of such an election is that it disallows foreign PE tax losses, so this and other factors need to be carefully considered before any election is made.)

• The reforms also include substantial changes to the controlled foreign company (CFC) rules, which generally apply to company accounting periods beginning on or after 1 January 2013.  Whilst the thrust of the new rules remains to counteract corporate tax avoidance through diverting profits to low-tax territories, the way in which this is achieved is more prescriptive under the new rules.  For example the new rules do not include a formal clearance procedure or motive test, the principle being that all non-resident companies with a 25% relevant interest held by a UK-resident company are CFCs.  However there are various “entity-level” exemptions (such as for companies in excluded territories or with low profits and companies not taxed at less than 75% of the equivalent UK tax) and “gateway tests”, which in many cases will avoid a CFC apportionment.  (i.e. foreign profits becoming subject to UK tax) There are also favourable provisions that can apply to reduce the effective UK tax rate on the non-trading finance profits of a CFC to 6.5% or less subject to various conditions being satisfied.

• A less recent reform (from March 2002) was the introduction of a capital gains exemption, such that where UK holding companies which trade or are part of a trading group make a gain on sale of a substantial shareholding in another company, (which can be as small as a 10% shareholding), the gain is exempt from tax provided certain other conditions are met.

• Financing arrangements for groups may need to be considered separately from the shareholding structure.  The UK tax rules for loan relationships are generous compared with many other countries and can provide advantages for UK group finance companies.  (However, worldwide debt cap rules were introduced for large groups for accounting periods beginning on or after 1 January 2011, which can restrict the deductibility of finance costs in UK companies where the net UK debt is excessive compared with worldwide group debt.)

Summary

When you consider the above points, combined with the benefits of the UK’s ever-expanding network of double tax treaties, and the absence of any UK withholding tax on outbound dividend payments; the UK scores well as a holding company location compared with many other counties, from the perspective of both UK and overseas investors.

For further information or advice on this subject please contact Sarah Brock – Corporate Tax Manager at Ward Williams on 01932 830664 or email: sarah.brock@wardwilliams.co.uk