Strategies for delaying income to 2013/14
This news item was updated on 14 December 2012 to take account of the changes announced in the Autumn Statement 2012.
It was announced in Budget 2012 that the additional rate of income tax will fall from 50% to 45% on 6 April 2013. The dividend additional rate will also be reduced from 42.5% to 37.5%. Therefore, it will be advantageous for affected individuals to delay the receipt of income until after this date, effectively saving 5% on any income successfully deferred.
For simplicity, these rates of tax are referred to as 'additional rates' in this news item.
The additional rates apply to income in excess of £150,000. Additional rate taxpayers are not entitled to a personal allowance as, at this level of income, it has been tapered away to nil, see the Personal allowance guidance note.
The strategies discussed below could be used to reduce an individual's income, ideally to an amount of less than £150,000 in 2012/13 (and potentially in 2011/12), to ensure income is not taxed at the additional rates unnecessarily.
The strategies discussed in this news item are non-aggressive. There will be other opportunities for taxpayers to defer income using bespoke planning arrangements specific to their circumstances.
Owner-manager of a limited company
It will be fairly straightforward to delay the income of those individuals who run their own companies. This is because they are able to reduce their own salaries (if they do not already do so) and ensure profits are withdrawn from the company by way of dividends.
In terms of delaying an individual's income, probably the most effective strategy will be to:
· •delay the vote and payment of dividends until after 5 April 2013
· •cover any cash flow difficulties via a short-term loan from the company, and
· •repay the loan using the delayed dividends
The legal aspects of making valid dividend payments are discussed in the Dividends guidance note (subscription sensitive).
Remember, it is only tax efficient to delay the receipt of income in excess of £150,000 as this is the point at which the additional rates apply. There is no reason to consider delaying income under this threshold (unless you are trying to reduce income in order to preserve an individual's personal allowance).
However, for those used to an income in excess of £150,000, delaying income by ensuring dividends are voted and paid after 6 April 2013 may leave the individual at a cash flow disadvantage. If this is the case, the individual could consider taking a loan from the company.
Taking a loan from a company in which the person is an employee / office holder and shareholder has a number of tax consequences:
· •if the company is a close company, there will be a corporation tax charge of 25% on the amount of the loan, unless it is repaid within nine months of the company year end (CTA 2010, s 455-457 (subscription sensitive))
· •there will be a benefit in kind, which is additional income, if the loan is interest-free or the interest rate is lower than the HMRC official rate of interest (4% for 2012/13) (ITEPA 2003, ss 173-191)
This benefit in kind should be factored into any calculations. Note that the benefit in kind applies irrespective of whether the loan is repaid in time to prevent a charge under CTA 2010, s 455(subscription sensitive).
The meaning of 'close company' is discussed in the Loans written off guidance note.
The calculation of the benefit in kind is covered in the Interest-free and low interest loansguidance note.
As long as the date of the dividend payment is within nine months of the year end (and after 6 April 2013), the corporation tax charge on the loan should be avoided. Otherwise the corporation tax charge can be reclaimed nine months after the end of the accounting period in which the loan is repaid.
Finally, from a cash flow point of view, delaying dividend payments may mean that the individual's Self Assessment payments on account can be reduced for 2012/13 and, as a consequence of the lower level of income in 2012/13, the payments on account will automatically be lower in 2013/14. An example of this is given in the Dividend planning issues guidance note (subscription sensitive). For guidance on reducing payments on account, see the Payments on account guidance note.
Take care to consider the implications of the PA Holdings case. This case involves the reclassification of dividends as employment income and has a knock-on effect for alphabet shares and the waiver of dividends by non-employee shareholders. For more information, see theDividends guidance note (subscription sensitive).
HMRC v PA Holdings Ltd  STC 582 (subscription sensitive)
Also, remember that any loans to office holders or employees must not come from third parties otherwise the entire loan will be treated as employment income under the disguised remuneration rules. These are discussed in detail in the Disguised remuneration guidance note (subscription sensitive).
Care must be taken to ensure that any loans are compliant with the Consumer Credit Act. This type of loan will normally be an exempt transaction under consumer credit law and, if entered into only occasionally, should not prompt the company to need to register. However, to remain exempt the loan must not carry a rate of interest of more than 1% over bank base rate and there must be no other charges for credit.
Finally, remember that deferring income in this way is likely to be considered avoidance for the purpose of tax credits. However, this is extremely unlikely to be relevant to additional rate taxpayers due to the level of their income. For more, see the Notional income and anti-avoidanceguidance note which explains that delayed dividends may be considered 'notional income' in terms of calculating any tax credit entitlement.
Self-employed or in partnership
Strategies for delaying income (or reducing the amount of income liable to tax at the additional rates) for those who are self-employed or in partnership are less obvious and will depend on the specific circumstances.
Some ideas include:
· •maximise pension contributions in order to increase the basic rate and higher rate tax bands, see the Tax relief for pension contributions guidance note
· •make donations to charity under gift aid, which could include cancelling direct debits / standing orders and making a bumper one off payment to the same charity instead. It is also possible to make donations under gift aid in 2013/14 and carry these back to 2012/13. See the Gifts of cashguidance note
· •ensure any trading losses are utilised in the periods of assessment which fall to be taxed in the 2011/12 and 2012/13 tax years, rather than carrying forward losses to 2013/14, see the Losses incurred by continuing trades guidance note for more on the utilisation of trading losses
· •accelerate capital expenditure which will qualify for the annual investment allowance (AIA), see the Capital allowances guidance note for an overview of capital allowances. As the AIA is to increase ten-fold to £250,000 from 1 January 2013 (for two years), there is even further scope than before to obtain relief for capital investment. For more information on the increase to the AIA, see the Annual investment allowance: temporary increase for two years news item (subscription sensitive)
This advice can also be summarised as 'buy, don't lease' as, in most cases, this will produce a larger deductible expense in the early years.
Those with a March year-end and fluctuating profits could also consider changing the accounting date to April. If profits are rising, this would delay the taxation of increased income but, depending on the circumstances, it may not be:
· •possible (if a change has been made to the accounting date within the last five years), or
· •desirable (for a number of commercial reasons, eg synchronisation of VAT periods)
The flip side of this planning is that, where a trader has large overlap profits, it may be a good idea to utilise these by bringing forward the accounting date to March. However, again this may not be possible or desirable for other reasons — it will depend on the specific facts of the case.
For those with parallel companies, it will be more efficient to ensure that work is done which falls within the trade of the company, rather than the self-employment trade / profession.
Finally, there is always the possibility that the self-employed person could consider taking extra holiday prior April 2013 to ensure less income is earned!
Remember that, although you can discuss the tax benefits of making pension contributions, you must not advise the individual to make contributions unless you are suitably qualified and authorised to do so. See the Regulated investment advice guidance note.
With pension contributions, you must also take care to avoid an annual allowance charge. For more information, see the Annual allowance from 6 April 2011 guidance note. Make sure you take into account any unused annual allowance carried forward from previous years. Although the Chancellor announced in the Autumn Statement 2012 that the annual allowance will reduce from £50,000 to £40,000 this is not due to come into force until 6 April 2014 so will not affect a taxpayers' ability to pay contributions in the run up to 5 April 2013.
Similarly, although there is to be a cap on income tax reliefs, this will not come into force until 6 April 2013 and there are no anti-forestalling rules so this will not affect 2012/13 claims for reliefs (unless a loss arose in 2013/14 and was carried back). For more on the cap, see the Cap on unlimited income tax reliefs [updated] news item.
Assuming income-producing assets have been transferred to a spouse / civil partner where appropriate, there is usually little an employee can do to influence his remuneration package unless he is also the owner of the business. Transferring assets to spouses / civil partners is discussed in the Utilising allowances and lower rate bands guidance note.
Unless the employee can persuade the employer to incorporate benefits free from income tax and national insurance into his remuneration package, the most likely option is to increase his basic rate and higher rate tax bands by making pension contributions (via additional voluntary contributions (AVCs)) or donations to charity under gift aid (see above).
However, for employees who are able influence their remuneration packages, it may be possible to:
· •move a contractual bonus payment date from 31 March 2013 to 6 April 2013
· •include more benefits free from income tax and national insurance. For the most popular tax-efficient benefits, see the Non-taxable benefits guidance note.
Many companies with 31 December year ends will have a standard contractual bonus date of 31 March. It is possible for the employer and employee to agree to move the payment date by six days to ensure the 2012 calendar year bonus falls into the 2013/14 tax year. This can be done via a letter (usually from the Human Resources department) which informs the employee the bonus payment date is to be moved for the 2012 calendar year bonus only. The employee can accept the change in terms by signing and returning one copy of the letter.
The same potential traps apply as for the self-employed and those in partnership (see above), however there is one further problem that is more likely to impact employees: the ability to make AVCs to a defined benefit (final salary) pension scheme without incurring an annual allowance charge.
The rules governing the annual allowance changed from 6 April 2011. These changes included a reduction to the amount of the annual allowance, a revised method of valuing the increase in pension rights for members of defined benefit schemes (for the purposes of the annual allowance) and the introduction of a facility to carry forward unused annual allowance.
In order to calculate the annual allowance charge or the unused annual allowance for defined benefit members, information is needed from the scheme administrator. Unfortunately for advisers, due to the administrative burden of the changes to the valuation of the increase in members' defined benefit pension rights, the scheme administrators have been given an extra year before they are obliged to provide the necessary information to members. This means that the information on the increase in pension rights in respect of the 2011/12 and 2012/13 pension input periods will not be available until October 2013, but AVCs need to be paid by 5 April 2012 and 5 April 2013 to have an impact on the 2011/12 and 2012/13 tax liability respectively.
There are therefore significant risks in advising clients with defined benefit schemes on the amount of AVCs that can be paid without incurring an annual allowance charge. Given the multiplication factor applied to the increase in the pension rights, even a modest inaccuracy in the value of the opening and / or closing benefit could have a significant impact on your client's tax position.
This is discussed in more detail in the Annual allowance from 6 April 2011 guidance note.