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

November 2009

Agenda

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

Introduction to an unfriendly tax world

Natalie Smith

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?

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

… 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

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

Future tax changes

?

Are pensions losing their tax appeal?

Philip Moss

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

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?

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

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!

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

Effective remuneration for real companies

Karen Cooper and Erika Jupe

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!

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

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?

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

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

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

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

Capital gains tax for other share benefits

• Joint ownership plans• Growth/hurdle shares• Partly paid/deferred shares

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

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

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

Longer-term planning for corporates (1)

• Restructure company as LLP• Members of LLP are not employees (no NICs)• Tax transparent• Loss relief available

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%

Longer term planning for corporates (2)

• Re-location• Corporate re-domiciliation• Costs of restructuring• Executives becoming non-resident

What can you do?

• Some easy wins before 6 April• More complicated longer-term planning• Always consider potential downsides for

company

Any questions?