Capitalise on the Upcoming Higher-Rate Tax Change
Higher rate taxpayers, including a number of practice principals, will be cheered by the upcoming rate reduction from 50% to 45%, which comes into effect from 6th April 2013.
Some of these individuals, however, are blissfully unaware of the true potential of the tax savings they could make with a little forward planning.
Additional rate income tax
Applicable for an annual income of more than £150,000. Currently, the Taxman is walking off with a hefty 50% of those earnings – unless you’re clever about the timing of your interest payments, in which case you can effectively enjoy the 45% tax rate before it is officially launched.
Enjoy the 45% tax rate today
If you defer income to the next tax year, any interest payments will be subject to the new, lower 45% tax rate. One way to do this is to move any money from bank accounts that are subject to interest payments this tax year, into a one-year savings bond that pays interest at the end of the investment period – when the new tax rate will apply.
Shareholders or directors of companies, who can determine their salaries and bonuses, can postpone bonus payments and receive the same benefit. Self-employed taxpayers or firm partners will need to be cannier to move income in this way, such as by adjusting their accounting period.
Having looked at tax savings, don’t forget to examine tax reliefs. By bringing forward your expenses, such as pension payments or charitable contributions, to the current tax year, principals can enjoy an additional 5% in tax relief – as they will still be subject to the 50% rate.
In summary:
To save 5% in tax payments, defer:
- Income until after the new tax rate is introduced, on 6th April 2013.
- Bonuses, if you are a director or shareholder in a company.
- Investment income by moving money from an account that pays interest six-monthly or monthly to one that pays after a one-year investment period.
To save 5% tax relief, advance:
- 2013 pension payment before 6th April 2013.
- Practice expenses.
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