Effective remuneration in an unfriendly tax world are you ready for the 50% tax rate? November 2009

Transcription

1 Effective remuneration in an unfriendly tax world are you ready for the 50% tax rate? November 2009

2 Agenda Welcome Introduction to an unfriendly tax world Are pensions losing their tax appeal? Effective remuneration for real companies

3 Introduction to an unfriendly tax world Natalie Smith

4 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?

5 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

6 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

7 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

8 Future tax changes?

9 Are pensions losing their tax appeal? Philip Moss

10 Pensions where are we? Recap - "A Day" reforms Budget 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

11 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?

12 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

13 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!

14 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

15 Effective remuneration for real companies Karen Cooper and Erika Jupe

16 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!

17 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

18 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?

19 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

20 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

21 Benefits of charitable giving Likely to become more valuable, especially for those losing taxfree personal allowance Extend basic rate tax band by the gross amount given to charity Example income of 110,000, charitable donation of 10, / /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 - 100,000 Taxpayer saves 5,000 of personal allowance for 10,000 of income. Plus 4,000 in tax relief

22 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

23 Capital gains tax for other share benefits Joint ownership plans Growth/hurdle shares Partly paid/deferred shares

24 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

25 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

26 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

27 Longer-term planning for corporates (1) Restructure company as LLP Members of LLP are not employees (no NICs) Tax transparent Loss relief available

28 Benefits of becoming an LLP Individual taxpayer (top rate 50%) Dividend (small company) Effective tax rate 2009/ % 49.53% Effective tax rate 2010/2011 Remuneration 47.70% 56.57% LLP 41.00% 51.00%

29 Longer term planning for corporates (2) Re-location Corporate re-domiciliation Costs of restructuring Executives becoming non-resident

30 What can you do? Some easy wins before 6 April More complicated longer-term planning Always consider potential downsides for company

31 Any questions?