Tax-savvy family firms set to duck 50p rate

Tax-savvy family firms will avoid the new 50p income tax rate by keeping profits within their outfits rather than paying out the money, an advisor confirmed to CUK.



Accountants at BDO Stoy Hayward stood by their prediction that tax rises unveiled last month for people earning £150,000 will see dividends shunned for reinvestment.



"One of the consequences of Darling's Budget is that it will encourage many family businesses to leave surplus funds in their companies," said BDO's Stephen Herring.



"I am not talking about money you would want to spend on a yacht but for savings, cash that's not needed for personal consumption."



Explaining the options, he said extracting money to put into savings products would see higher rate taxpayers pay 40% on any interest, or 50% if they earn over £150,000.



If a person's income breaks this ceiling from April next year, the tax due via dividend will rise to 36.11%, up from 25% today, as the new higher dividend rate will apply.



With lower corporation tax rates, currently 21% for traders whose profits are under £300,000p/a, it will be more attractive to retain the money in the firm for investment.



However, the Treasury is likely to take a dim view of such tax planning, as Mr Herring reminded that the taxman once came up with rules to force distribution of profits.