Effective remuneration in an unfriendly tax world – are ... · The pain of income tax … •...
Transcript of Effective remuneration in an unfriendly tax world – are ... · The pain of income tax … •...
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Effective remuneration in an unfriendly tax world – are you ready for the 50% tax rate?
November 2009
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Agenda
• Welcome • Introduction to an unfriendly tax world• Are pensions losing their tax appeal?• Effective remuneration for real companies
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Introduction to an unfriendly tax world
Natalie Smith
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The current climate
• An economic downturn = challenges for all companies
• Drive to cut costs v need to motivate and retain key staff• Alternative approaches• Flexible working/flexible benefits
• Getting the most from existing/current benefits• Equity – is it all over?
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The pain of income tax …
• Highest marginal rate currently 40% • Increasing to 50% for income above £150,000 in
2010• Restriction of personal allowance for income over
£100,000• Associated NIC costs for remuneration
• Employees – 1%• Employers – 12.8%• Set to increase by 0.5% in 2011
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… the relief of capital gains tax
• Capital gains currently taxed at a flat rate of 18%• Potential planning using annual exemptions and
spouse transfers• Abolition of taper relief• Entrepreneurs' relief – limited scope for employee
shareholders• 10% on first £1 million of gains• Must own 5% of shares for at least 12 months
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HMRC is getting tougher
• Fear of tax leakage• Dependency on higher rate tax payers at risk during
recession• HMRC estimates that in 2009, 25.4 million basic rate payers
will contribute £65.1bn, while just 2.91 million higher rate payers will pay £75.1bn
• Spotlight on tax planning• HMRC is actively targeting aggressive tax planning• Increasing liaison between departments
• More emphasis on disclosure and dialogue with HMRC
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Future tax changes
?
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Are pensions losing their tax appeal?
Philip Moss
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Pensions – where are we?
• Recap - "A Day" reforms • Budget 2009 -
• From April 2011 tax relief restricted to basic rate for those with incomes of £150k and over
• No impact if incomes lower than £150k • Consultation for changes in 2011• Immediate impact - "anti-forestalling rules"• These rules will apply to all pension schemes
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What do we mean by Income?
• Income = all taxable income, not just salary• employment and pensions income • savings, rental and other investments
• Premium on managing income to fall below £150k
• Salary sacrifices?• Husband and wife planning?
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Anti-forestalling rules
• Taxable income - £150k or more in any of years 2007/08 to 2010/11
• Money purchase schemes - Increase pension savings after 22 April 2009 beyond "normal regular saving"
• Company schemes - material change to the way that benefits are calculated
• Restricted to 20% tax relief above de-minimis threshold - £20k
• Certain cases extended to £30k
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What does this imply for the future?
• Higher rate tax - 40%, charge 20%• Higher rate tax - 50%, charge 30%?• Why might it not happen?
• General election?• Civil servants!
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Will it change behaviour?
• No impact if income less than £150k• If £150k or more
• Still get relief at 20% - but is it worth it?• Analysis of benefits
• Will be a real shock for members of company schemes
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Effective remuneration for real companies
Karen Cooper and Erika Jupe
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Can we beat the 50% tax rate?
• Accelerating an income tax charge before 6 April 2010
• Incorporation• Converting income to capital gains • Crystallising capital gains• Problem – tax rates might change again!
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Dividends
• Dividends currently taxed at 32.5% on dividend plus tax credit - effective tax rate is 25%
• New additional dividend rate of 42.5% applies from April 2010 (effective tax rate will be c.36%).
• Pay interim dividend pre-April 2010; or• Change accounting reference date
• Will accelerate CT payment date
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Salary/Bonus
• Pay salaries in form of interest-free loans• Write off loan if top rate of tax reduces
• Advancing salary/bonus payments pre-April 2010• Executive loans back to company• Company repays loan on a monthly basis
• Risks • Risk of re-characterisation• Loss of corporation tax relief• Close companies – loans to participators• Disclosure? • Can bonus amounts be determined pre-April?• Termination of employment?
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Share benefits
• Exercise vested unapproved options/awards before 6 April 2010
• Grant new awards when share price low• Re-structure LTIP awards to nil
cost/unapproved options • Flexibility to exercise over different tax years• Tax rates might reduce
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Limiting taxable income
• Keep income below £150,000• Top up with other benefits eg. holidays• Income split with spouse/civil partner• Salary sacrifice arrangements
• Child care vouchers, cycle-to-work scheme, pensions, additional share incentives
• Essential to obtain HMRC clearance
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Benefits of charitable giving• Likely to become more valuable, especially for those losing tax-
free personal allowance • Extend basic rate tax band by the gross amount given to charityExample – income of £110,000, charitable donation of £10,000
2009/2010 2010/2011
Cost to taxpayer is £8,000.Higher rate payer claims a further £2,000 in relief
Income deemed to be after gross value of charitable donation - £100,000Taxpayer saves £5,000 of personal allowance for £10,000 of income.Plus £4,000 in tax relief
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Obtaining CGT treatment with HMRC approved schemes
• Make full use of HMRC approved share schemes
• Capital gains tax treatment, subject to conditions• Discretionary options – EMI and CSOP• All-employee schemes – SAYE and SIP
• Grant awards up to scheme limits• EMI - £120,000/CSOP - £30,000
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Capital gains tax for other share benefits
• Joint ownership plans• Growth/hurdle shares• Partly paid/deferred shares
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Trust-based planning
• Family benefit trust• Payments to trust and allocated to sub-trust for employee's
family• Trust makes loans to family• Benefits can be taken tax-free• Loans left outstanding• Can a tax deduction be claimed as well?
• HMRC taking an interest in these arrangements!• Inheritance tax issues• Possible change in law
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EIS and VCT
• Investments through Enterprise Investment Scheme/Venture Capital Trusts • Income tax and CGT relief on qualifying
investments• Income tax relief at 20% for EIS and 30% for VCT• No CGT on sale of EIS/VCT shares provided shares and
company still qualify under the schemes• Strict conditions must be complied with to be
eligible for income tax and CGT reliefs• Possible alternative to pensions
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Longer term planning for individuals
• Personal service companies• Create limited company – taxed at small companies rate
corporation tax at 21%• Payments by way of loans from service company• Must prove self-employed• IR35
• Freelance/self-employed• Change accounting reference date as before – pay
dividends• Delay forthcoming expenses• Benefits for employers – no NICs, no sick leave,
no pension contributions
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Longer-term planning for corporates (1)
• Restructure company as LLP• Members of LLP are not employees (no NICs)• Tax transparent• Loss relief available
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Benefits of becoming an LLP
Individual taxpayer (top rate 50%)
Effective tax rate 2009/2010
Effective tax rate 2010/2011
Dividend (small company)
40.75% 49.53%
Remuneration 47.70% 56.57%
LLP 41.00% 51.00%
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Longer term planning for corporates (2)
• Re-location• Corporate re-domiciliation• Costs of restructuring• Executives becoming non-resident
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What can you do?
• Some easy wins before 6 April• More complicated longer-term planning• Always consider potential downsides for
company
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Any questions?