How IT contractors can offset the 50p tax

There are some simple ways to reduce your exposure to the 50p tax rate that do not require complex structuring, writes Paul Spindler, technology partner at Kingston Smith LLP . These ways may only be chipping at the edges but, at the end of the day, it all counts!

1. Review

Look over your expenses carefully to see if you are missing out on anything, the main categories to consider are:

- Use of home
- Use of personal equipment for business purposes
- Subscriptions
- Motor expenses (not ordinary commuting)
- Other travel

2. Optimise tax allowances

* Ensure you maximise the amount of money you put in an Individual Savings Account. The ISA limit is currently £7,200 per year or £10,200 if you are aged over 50. These amounts may appear low, but given ISAs allow for tax-free income and capital growth, you will be able to build up a substantial sum over several years.

* If you are in the £100,000-£113,000 income bracket, where the marginal tax rate is 60%, pension contributions are a good way of reducing your taxable income. However, there are restrictions and you should consult your tax adviser to ensure you know exactly what tax relief you will be getting on the contribution.

* Remember that interest on some national savings accounts is paid tax free and premium bond prizes are exempt from tax.

3. Try to equalise income between spouses

In most cases, investment assets can pass between spouses tax free. If there is an imbalance in earnings between spouses, try to ensure that investment assets which generate income are held by the spouse with the lower marginal tax rate.

4. Accelerate income

If you have a bank account that will pay large amounts of investment income annually after April 5, then consider closing down the account just before April 5 so that interest is paid on closure in the 2009/10 tax year.

5. Delay payments on which you obtain tax relief

Consider delaying any payments you make to charity until after April 5. Payments to charities attract gift aid and will mean 50% tax relief.

6. Loans to your own business

If you have lent money to your own business, are you charging interest and, if so, at what rate? Many owner-managed businesses rely on capital provided by their owners who often do not receive interest on their loan. Payments of interest do not attract national insurance, have only basic-rate tax deducted at source (higher rates are collected through self-assessment) and are usually tax deductible for the payer.

For further guidance on these tax-planning tips, please contact Paul Spindler, a partner within the technology group at Kingston Smith LLP.
 

Monday 8th February 2010