Take steps to minimise your tax burden as regime change beckons

Peter Young, director of tax at Johnston Carmichael, offers his last-minute tips for those facing higher income tax.

1 PENSION CONTRIBUTIONS

It is still possible to obtain higher rate tax relief on pension contributions, although this is restricted for higher earners. The Chancellor introduced complicated anti-forestalling rules in the last Budget and there is the possibility that further restrictions will be applied.

2 CHILDCARE VOUCHERS

The government has confirmed that – for now – childcare vouchers are here to stay, so if you can "sacrifice" some of your salary in exchange for these vouchers, then this could go some way to lowering your income.

However, from April 2011, new entrants to the scheme – including higher rate taxpayers – will only get basic rate tax relief of 20 per cent.

3 REDUCE SALARY OR DIVIDENDS

Owner managers could find the best solutions from flexible pay arrangements. Lowering salary and increasing dividends could prove more efficient, although it is necessary to consider the tax implications for the company too.

Higher rate earners are subject to dividend tax at 32.5 per cent and a new rate of 42.5 per cent will be introduced for those earning over 150,000.

4 GET PAID EARLYIf there is any flexibility, consider having any bonuses paid before 6 April. This is particularly relevant if your income in 2010 could breach 100,000 (with the resulting loss in personal allowances) or 150,000, with the 50 per cent tax rate applying. Alternatively, if you are in a partnership or run your own unincorporated business, it may pay to move your year-end so that profits are assessed this year rather than next year.

5 CONSIDER INCORPORATION

An option which may be considered for unincorporated businesses is to go down the route of incorporation. The attraction here is to have profits from the business taxed at corporation tax rates of 21 per cent or 28 per cent, rather than income tax rates (40 or 50 per cent). There is always the question of how best to take profits out of the company, but with careful planning it may be possible to reduce the burden of taxation considerably.

6 USE YOUR SPOUSE

Transferring any income-bearing assets to lower earning spouses can help to share the tax burden. This is particularly relevant if the spouse does not use his or her personal allowance or basic rate band.

Take, for example, a couple where one spouse has annual income of 80,000 and the other 15,000 a year. If the higher earning spouse were able to transfer 20,000 of income (say transferring cash on deposit or a rental property), then this could save the family 4,000 of tax annually.

7 GIFT AID CONTRIBUTIONS

Try and ensure charitable donations are made by the spouse who pays higher rate tax. For instance, a charitable donation of 1,000 by a 40 per cent taxpayer would generate tax relief of 250 but no relief for a basic rate taxpayer. If a high earner is planning a substantial one-off donation, there may be grounds for delaying this until 6 April, when tax relief of 375 on a 1,000 gift could be achieved.

8 USE YOUR ISA ALLOWANCE

From April 2010, all savers will benefit from the increase in the individual savings account (Isa) allowance to 10,200, which was extended for the over-50s last October. Using your full allowance should be part of your annual tax efficient practice.

9 MOVE TO CAPITAL

With income tax at 50 per cent for higher earners, moving assets to seek a capital rather than income return may be wise given that the current capital gains tax rate is 18 per cent. Furthermore, we all have a tax-free annual exemption of 10,100 before paying capital gains tax.

Moving any investments into property, shares, unit trusts or related investments may be worth considering for the longer term but tread carefully, take professional advice and be aware that tax rates could change in the future.

10 VENTURE SEEKING

The Venture Capital Trust scheme allows individuals to invest in companies listed on the London Stock Exchange that are run by fund managers to invest in small unquoted trading companies. Income tax relief of 30 per cent is available on qualifying investments and any resulting dividends are exempt from income tax.

Again you should take advice from a financial adviser before making any investments.