The looming increase in income tax rate to 50% for the higher paid will lead to a decrease in employee salaries and bonuses paid after 5 April.
Also affected are pensions and other fixed incomes due to be paid after 5 April, an increase in the employee national insurance rate, and compensation and termination payments received by taxpayers who otherwise would be beyond the scope of the 50% rate.
All those earning over £150,000 a year will be affected by the change in the income tax rate, while those earning over £100,000 will be affected by the removal of the personal allowance from 6 April 2010.
Mark Walters, managing director of the taxation and accounting practice Frank Hirth, identified some potential solutions: “Companies might consider various deferral plans, examples being: forwarding of bonuses into the current year or implementing compensation arrangements such as the advancement of employment income or partnership profit shares pre-5 April 2010.
“However, this can have its own legal challenges to overcome. Before such a plan can be put in place companies will need to consider in what circumstances the monies could be returnable to the employer.
“Companies will ultimately want flexibility with limited lock-in periods. They may explore the increase of share incentives where capital gains, currently at 18%, can be maximised, either under approved plans or by designing incentive restrictions with a prospectively small income tax burden, thereby achieving longer term capital gains tax on growth thereafter.”
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