Those who can control their income flow, such as family and owner-managed business owners, are already delaying income into the new tax year, while making effort to save tax at the additional rate in the current year (through taking advantage of reliefs such as pension contributions).
One other part of the tax system potentially impacted by this change are those in the Trust regime. Discretionary Trusts, a common wealth protection vehicle for intergenerational tax planning, suffer the Trust rate of tax on most of their income. This Trust rate has historically followed the additional rate, and may also reduce in the new tax year.
Trustees are therefore considering delaying income into the new tax year where possible, and looking to access historic tax pools while tax rates are high - the tax pool being a log of Trust tax previously paid by Trustees (and which is potentially recoverable by beneficiaries on receipt of income distributions).
Take a Trust with £55 of undistributed income and a tax pool of £45. If the £55 of income is distributed to a beneficiary with a personal allowance in the current tax year, the full £45 can be recovered by the beneficiary from the tax man. However, if the Trust rate of tax reduces to 40%, and the distribution is delayed until the new tax year, the tax recovery reduces to £36.67.
In a similar way, if Trustees own shares in a family or owner managed business, they will pay 39.35% dividend tax in the current tax year, but this will reduce to 32.5% if the dividend is delayed to the new tax year. If the dividend cannot be delayed and tax is suffered at 39.35%, a tax saving for Trustees without a tax pool could be realised by delaying a distribution of the income to the new tax year.
Given the reaction to the mini-Budget, it remains to be seen whether changes as announced will come to fruition, but Trustees should keep the matter under review. Although Trust taxation can appear complicated, the benefits of a Trust can be very significant, as set out in our guide.
Get in touch with your usual Crowe contact if have any questions or if you would like to discuss Trust planning in more detail.
Mini-Budget 2022: Cuts to personal tax
The tax implications of Trusts