Capitalising on the 50% tax bandFrom April 2010 UK income tax will be 50% for high earners, defined as having earnings above £150,000 per year.
While there is no easy way to avoid this crippling rate short of leaving the country, which some are already planning to do and with Switzerland a favourite choice, thoughts must turn to the classic difference between "revenue" and "capital".
In the e-book "Debunking the balance sheet", the difference between revenue and capital was explained in relation to expenditure. Now we need to look at these definitions in relation to income and specifically "earned income" as opposed to income from sales.
A cornerstone feature of the UK tax system has always been the distinction of income from wages and profits from capital assets (those assets defined as capital expenditure when incurred). An investment in the equity shares of a company is a "capital" one. Such an investment has two spin-offs. First a dividend or share of profit of the company and secondly the appreciation in the market value of the share.
For some time now, share dividends have been regarded for tax purposes as a reward for risk taking and taxed at a lower rate than wages and salaries. The gain from a capital asset has been subjected to varying rates of tax over the years but is currently quite low. Where is all this leading?
High earners could take some of their pay as shares in the company they work for. Any capital gain will be taxed currently at 18% and the dividends will be taxed at an effective rate of 25% or next year at 32%.
Owners of a company could choose to pay themselves via dividends in part substitution for salary although it is more complicated than that since dividends are not tax deductible before the "taxable profit" is struck and corporation tax is payable on such profits.
Two other possibilities for capitalising on the top tax imposition is for the self-employed to incorporate themselves and pay corporation tax on profits (between 21% and 28% currently) and for partnerships to appoint a "corporate partner" for investment back into the firm (28% tax).
National Insurance levy and pension contributions must also be taken into account.
jgs- 2009
