Family businesses might avoid higher income tax

Family businesses are likely to retain more profits within their business
rather than take the funds out and face an income tax hit.

Advisers have suggested that to avoid the new 50% income tax rate, family
businesses will keep more profits within the business to avoid paying more tax,

‘One of the consequences of Darling’s Budget is that it will encourage many
family businesses to leave surplus funds in their companies. 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,’ said BDO Stoy Hayward’s senior tax partner
Stephen Herring.
Taking money out of a company as dividends attracts a 25% income tax rate. But
when this is placed into a savings product it is then taxed at 40% for higher
rate taxpayers or 50% for those with income over £150,000 from next April.

With lower corporation tax rates, Herring said funds may be retained in the
business for investment. He warned that the taxman has in the past introduced
rules to force distribution of profits.

Further reading:

firms ‘likely to retain more profits’ to avoid 50pc income tax

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