Using a company and the 45% rate of income tax

In the 2008 Pre Budget Report a new 45% rate of income tax was announced on anyone earning over £150,000 per tax year. It won't apply though until 6 April 2011. It will apply to all types of earnings so will include:

Employees

Property traders with substantial trading profits

Property investors with substantial rental income

Anyone with substantial investment income

Traders with substantial trading profits Note that dividends are excluded from this list. They'll still be caught but will be taxed at a new 37.5% rate of income tax. This equates to an effective income tax rate of 30.5%. Many of the people on the list above would have the choice whether to trade or hold assets in their own name or alternatively to use a company. When you you look at the position of a company, it looks very favourable when compared to individuals. The key issue is that the small company rate of corporation tax is currently 21%. When compared to a 40% or 45% rate of income tax this looks very attractive. Trading income would also be subject to NIC within the basic rate band, whereas company income wouldn't. Of course this assumes that no profits are extracted from the company. If profits are extracted from the company there would then be an income tax charge. Many company users though would look to extract minimal cash from the company and benefit from the lower rate of corporation tax in the company. Using a company would therefore be a simple option to avoiding the 45% income tax charge. For more details on using a company to avoid the new 45% rate of income tax see: Using a company to avoid the 45% super tax