With the top income tax rate at 50% for those earning over £150,000, owner-managers are finding it increasingly difficult to extract wealth from their businesses without having to pay significant amounts of tax. As the Government continues to crack down on tax avoidance, the options for tax-efficient value extraction seem limited.
Income tax: an end in sight for the 50% rate?
In the recent Budget, the Chancellor gave the strongest indication yet that the marginal 50% income tax rate could be eliminated as soon as 2013. A review of the exchequer benefits of the 50% tax rate by HMRC will likely determine the outcome as to whether the rate is retained or not. Should the 50% rate be abolished, along with the 42.5% dividend tax rate (which taxes dividends at an effective tax rate of 36%), dividends extracted after abolition may be subject to an effective rate of tax as low as 25%.
Given this prospect, owner-managers should now consider carefully the merits of postponing or limiting the extraction of surplus by way of dividend from their companies.
Corporation tax: restructure your LLP into a company, or hedge your bets?
One of the key features of the latest Budget is the cut in the main rate of corporation tax from 28% to 26% and further reductions in the main rate, ultimately to 23% in the 2014/15 tax year. The small profits rate of corporation tax has also been cut, from 21% to 20%.
It may well therefore be advantageous to restructure your LLP into a company. However, this needs to be weighed against the probable abolition of the 50% income tax rate.
If this route is not suitable, a potential alternative may be a hybrid LLP/corporate structure, thereby facilitating an effective hedge against tax.
These are uncertain times for owner-managers and we would be very happy to discuss with you the issues raised in this briefing note in more detail.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
