The Labour Party’s published tax plans include several not-so-friendly proposals for high earners and those with substantial dividend income.
For high earners the proposal with most potential to hurt the pocket is the increase in rates above earnings of £80,000, the proposed new threshold for the 45 per cent rate of tax. And with a new top rate of 50 per cent, those with earnings between £125,000 and £150,000 will be paying 10 per cent more tax than they currently do just on that band of income. Those who have not maximised their allowable pension contributions may see this as incentive to do so going forward, and if there is flexibility on remuneration between employee and employer, employer contributions under salary sacrifice arrangements could be encouraged.
For investors the proposed new tax regime on dividend income will have a major impact, with dividends no longer being charged at a favourable lower rate. The increase in rate on dividends falling within the basic rate band from 7.5 per cent to 20 per cent, together with loss of the dividend allowance could mean an additional tax cost of more than £4,800 for investors with substantial dividends.
Dividends falling into the higher rate band will also suffer a tax increase of 7.5 per cent. Those affected will want to make sure they make full use of ISA allowances. Moving assets between spouses to ensure each spouse makes full use of their lower rate bands will also produce a saving.
Where dividend income is particularly large it may be worth considering transferring the investments to a personal investment company, so future income is received and rolled up in a more favourable tax regime. However, this comes with its own costs, including tax charges on income extraction, and would likely crystallise a capital gains tax charge on transfer into the company, based on market values at the time of transfer, so specific advice needs to be taken.
Some individuals choose to operate their business through a limited company. These individuals currently benefit from a very generous tax regime. The combined impact of proposed increased corporation tax rates and changes to dividend taxation will hit these taxpayers hard. Making sure pension contributions are maximised and managing dividend extraction, retaining any funds which are not currently needed by the individual within the company, are actions worth considering.