April is only around the corner and with it comes the 50% higher tax rate. Accountants are reporting a booming business in clients contacting them to ask advice on how to avoid this increased tax rate.

Jenrick IT has experienced an increase in contractors queries regarding where to get the best tax advice, especially if they are operating under a PAYE or Umbrella scheme.

We have taken advice from a number of accountants and collated the best information we could source, three of which have been highlighted below from JK Tax Advisors, 1st Option Accountancy and ICS:

Julie Kingham – Managing Director, JK Tax Advisors

Congratulations, you are earning over £100,000 a year and as a reward your tax burden will increase from 6 April 2010.

Now the tax aware amongst you will be thinking that it is only taxpayers earning £150,000 or more who are going to be hit with the 50% super tax rate, but this is not the case.  For those with income over £100,000 your personal allowance will be restricted by £1 for every £2 over £100,000 – so your personal allowance will be £0 as soon as your income reaches £112,950. (The effective rate of tax on income up to £112,950 becomes 60%.)

So, how do you avoid the increase in tax?  Below are a few methods which are not classed as a tax avoidance schemes and are not open to attack from the Revenue:

1. Consider making any bonuses before 5 April 2010 – however, there is a cost to the company in bringing forward tax and national insurance contributions.
2. Bring forward the payment of dividends – as long as there are enough distributable reserves in the company.
3. Ensure that income is effectively spread between spouses to avoid one party being taxed at the higher rate of tax.  Beware though, as care is needed to ensure that HMRC do not try and apply the settlements legislation arising from “income shifting”.
4. After 6 April 2010 ensure that tax relief is achieved through gift aid payments and other tax relief’s fall into this tax year, (but be careful if using pension contributions).

As is always the way of things, tax should not be the overriding factor when considering a course of action.  Seek professional advice, and do the number crunching, before taking action!!

David Mount – Director, 1st Option Accountancy for Contractors

As part of Government’s strategy to reduce the national debt, a number of new taxes have been introduced, two of which directly affect the higher end freelance consultant sector.  The first will affect those consultants who bill between £400 and £500 per day; and the second will affect all consultants billing in excess of £600 per day.

Tax Effect 1
The personal allowance (currently £6,475 per person) will be removed for people earning over £100,000 pa.  This change is being introduced on the basis for each £2 earned over £100k, the personal allowance will be reduced by £1.  Therefore, once an individual earns over £112,950 the personal allowance will be completely eroded.

What this actually means is that on the £12,950 worth of earnings i.e. the amount over £100k in the above example, £7,770  in tax is payable – which is an equivalent tax rate of £60%!

This is calculated at £5,180 (being the 40% that you would be expecting - £12,950 x 40%), plus an additional sum of £2,590 (being the additional 40% now payable because the personal allowance has gone - £6,475 x 40%)

Tax Effect 2
The highest rate of tax is rising to 50% for earnings over £150,000 pa.

So, up to £150k you will continue to pay 40% tax.  For every £1 in excess of £150k you will be paying 50 pence in tax.

Combined Effect
UK earners now find themselves in the ludicrous position that the rates of UK tax actual rise, then fall, then rise again as earnings increase…..

• Earner at £99,950 – top tax rate = 40%
• Earner at £112,950 – top tax rate = 60%
• Earner at £149,950 – top tax rate = 45.2%*
• Earner at £151,000 – top tax rate = 50%

* Don’t forget that this tax rate is still higher than 40% because this earner has already lost the personal allowance referred to in ‘Tax Effect 1’ above.

What can I do?

There are a wide range of measures that consultants operating via their own limited company can do to mitigate these tax increases.  Some of these measures include:

1. Review company structure – consider income splitting with your spouse.
2. Review long-term savings strategy – during this period of excessive taxation some funds can be invested into mediums that avoid or defer tax, including pensions and company investments.
3. Reappraise the mid and long-term income strategy of your business.  This may be an ideal time to consider income deferral.  This could also tie in with plans to close the company and utilise Entrepreneurs relief.
4. Review overall company expenses policy.

This list is not exhaustive but should serve as a prompt with which professional freelancers can approach their technical advisors…or call us!

John Lyon - Managing Director of ICS

• There is an increasing trend for contractors to look at opportunities abroad, however it is difficult to be certain whether this is due to the imminent 50% tax or whether the impact of the recession has more generally led contractors to look further afield for opportunities.
• There remains a strong demand for UK contractors, particularly in areas where there is a severe skills shortage, as is the case in IT and engineering.
• Anecdotally in our dealings with IT and engineering contractors there has been an increase in enquiries about working abroad as a result of the 50% tax. This has been mirrored in other key industries, particularly banking, where a number of people are considering moving to Switzerland, where the tax burden is considerably lower for high earners.
• Moving abroad is not for everyone, not least because of family commitments.
• There are other, less drastic, ways to address the issue of 50% tax. The most obvious is through effective tax planning, which is a service ICS offers to clients on an individual basis.
• We have seen an increase in demand for our Limited Company Service, which is considered perhaps the most prudent choice for contractors outside of IR35, as well as being a popular choice for people within IR35. Working through our Limited Company Service means you can increase your net income through lower National Insurance, Flat Rate Vat, and the option to claim back tax on a broader range of business expenses.
• We have also seen a rise in enquiries about our Umbrella Service, which was created to meet the requirements of contractors that want to enjoy the freedom and financial benefits of working as a contractor without the hassle of dealing with endless paperwork.
• Independent Contractor Services Ltd (ICS) was established in 2002 to provide individual accountancy, tax advice and administrative services to professional contractors.
• Our guiding principles are ‘care and compliance.’ We aim to provide very high service levels coupled with full compliance with all applicable legislation, including IR35 and MSC.
• We avoid using industry jargon and aim to help provide contractors with relevant and useful information so they can make an informed decision.
• We are one of the leading contractor accountants and administration companies and have helped many hundreds of contractors working in dozens of industry sectors through our Limited Company, Umbrella Company and Sole Trader services.

Summary:

Thank you very much to all our expert contributors for adding to this topic, we hope that you have all found it useful and for more information on this subject or others related to Contractor Accountancy, please visit any of the links below:

• JK Tax Advisors
• 1st Option Accountancy for Contractors
• Independent Contractor Services Limited (ICS)

Tags: contractor tax advice, income tax news, it contractor news

This entry was posted on Monday, February 22nd, 2010 at 5:20 pm and is filed under Jenrick IT, Job Market News. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.