It is widely assumed that a new tax rate of 39% will apply to individuals' tax earnings over $180,000 per annum for the 2021/22 tax year commencing 1 April 2021.
In addition to general wage earnings for both employees or business owners, there is also the consideration for shareholders in the business, in any given year where dividends or restructuring can cause income to spike and potentially be caught in the new 39% tax bracket.
Principally, if you are earning and spending on income over and above this amount then expect the new tax rate to apply.
Ironically, with the introduction of new trust rules from 2021 many people have been closing down trusts, but as it stands, a trust will continue to have a 33% tax rate which reflects a 6% tax saving compared to the personal tax rate. An opportunity exists to utilize trust shareholding to minimize the tax burden.
Deferral of tax on profits can also be achieved in a company which has a 28% tax rate, an 11% saving. But note that this is only temporary and once you start withdrawing the cash from the profits, you will trigger the requirement for a dividend, resulting in the additional 11% being paid.
However, where earnings above this are being invested into growing your wealth (e.g. shares, property) there may be opportunities to restructure.
For our clients with medium-sized businesses, there will need to be consideration given to dividends pre 31/3/2021, to negate prior retained profits being also taxed at this higher rate.
Restructuring of your affairs may be appropriate in some instances, but such decisions should not be purely tax-driven and you need to understand the risk and rewards of doing so. With that in mind, if you would like to explore this further, please get in touch to organize a tax planning session.