Tax planning boosts Government's finances

Tax planning undertaken last year to beat the introduction of the 50% top tax rate has clearly boosted the Government’s coffers this year.

The Office for National Statistics reported a public sector net borrowing surplus for January 2011 of £3.735 billion which was higher than expected by economists and the largest surplus since July 2008. Much of the increase was down to higher than expected income tax receipts.

Is this an early sign of recovery underway in the UK economy? Sadly no; its simply the inevitable result of Alistair Darling’s early announcement that a new 50% top rate of tax was going to be introduced from April 2010. In response, those who could undertook sensible tax planning and extracted dividends early from their company so that they paid tax at a 10% lower rate. The tax was due on those dividend payments in January 2011, hence the spike in tax revenues.

‘Clearly this is a form of tax planning which has boosted the Government’s coffers this year’ said Harwood Hutton tax partner, Cormac Marum. ‘I predict a very different picture this time next year. Tax revenues will be lower than expected because people will still be living off the nest egg they built up last year and will now keep their income below the threshold for paying the 50% top tax rate’.