How about fixing your Income Tax rate at just 10% for the next 5 years?

It strikes me that we are going through some very odd economic times right now. We have inflation soaring away, well above target figures, and yet the Bank of England's big gun for keeping rising prices under control is left in the shed with a blanket over it. Occasionally, the Governor wanders back in the shed, and considers to pulling the blanket off and lighting the touch paper - in so doing setting interest rates off on a merry upwards spiral. Thank the King that, so far, he has chosen not to do it.

I mean, can you just imagine what would happen if base rates returned to the level they were just a few years ago. It would kill any sign of recovery absolutely stone dead. We might just aswell return to the trees and learn how to hunt very quickly.

But if you have a quick look at fixed rate mortgages, you can see that the longer the period fixed, the higher the fixed rate becomes. So what does that tell you? It tells you that virtually all financial institutions predict that interest rates will rise. Sadly, no real surprise there.

So where is all this going? Well, I just wanted to draw a comparison to how we would all react if we were able to fix our interest rates for the next 5 years at an unbelievably low rate, and if we could do the same thing with our tax rates. Perhaps unbelievably is the wrong word, perhaps I mean a 'cracking low rate', you know, something like 1.5%? Hands up all of you who want one of these? No arrangement fees, perfectly legal, rate guaranteed. Well form an orderly queue behind me!

And what would you say if you could fix your 'income tax' rate for the next 5 years at 'cracking low rate', you know, something like 10%? Hands up all of you who want one of these? No arrangement fees, perfectly legal, rate guaranteed. Well form an orderly queue behind me! Well to be honest, you would have to be a long way behind me because I did this about 7 years ago.

Now, who spotted that 'income tax' was in inverted comma's? Good, that must be the catch then. Thank goodness, I can go back to paying 50 or possibly 60% tax. Umm, that feels nice...

OK, lets get the cat out the bag. Fact or fiction? Well, fact I'm afraid and yes, it's that old pantomime horse of a subject, dear old 'incorporation'!! The methodology has been discussed a thousand times before and can be proved well beyond all reasonable doubt (but it can't work for me, I'm a dentist! Rubbish, it works just as well for you as all the other 10's of thousands of businesses that have incorporated - just get on with it!)

So how does the 10% work? Well it works like this. You sell your goodwill in the practice to the company that you own for, say, 90% of your current turnover (familiar with that valuation model?). The company has no money on the day you sell it, so it gives you an IOU. Assuming the proceeds represent the entire gain (i.e. you paid nothing for it) then you will pay ever so slightly less than 10% on the transfer value (keep reading, you'll see later that this is your effective 'income tax' rate)

When it comes to taking the money from the company you do so in the following order

1 - salary, below the personal allowance/NI limit - tax payable - (err, £6,475 x 0% = err, NIL)

2 - dividend, gross amount less than your basic rate of tax (current year £37,400) - tax payable NIL (yes, NIL)

3 - balance of drawings from the company - a part repayment of the IOU (HAZZAH!! That's where the 10% tax rate comes in - although of course you have already paid it!)

So consider this -

You turn over £500k, you're married, and your married partner does not work. You make £150k profit per year

In the new company -

You both can get a salary of £6,475 = £12,950

You can both get dividends gross of £37,400 - £74800

So that means to draw the full £150k each year you take approx £60k out of your company IOU. And if you sold for 90% of £500k = £450, paid 10% tax = £45k, then the balance after drawing £60k is - (£450k - £45k - £60k = £345k). So effectively you could go on doing that for another five a three quarter years and you would have fixed you income tax rate at a maximum of 10%.

Any takers? Fancy doing that with effect from 6 April 2011 and have no more income tax bills for years (yes, NO MORE income tax bills for years). Then call