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How much Darling? The Chancellor announced ambitious plans on Monday for bailing out the British economy, including £1.8billion to revive the ailing housing market and £1.3billion to help get the unemployed back to work. Whilst Contractors had cause to be positive on corporation tax rates, expenses and income shifting, we all knew that there would be a catch – all of this money has to come from somewhere and contractors could be in the firing line again come 2010. The new budget will mean the government must borrow in excess of £118billion and to help repay this debt. National Insurance will rise by 0.5% in April 2011. For contractors working through PAYE umbrellas and those limited company owner/directors caught by IR35, this represents a further hike in the tax take. The Salary Sacrifice Solution In the face of IR35, MSC clampdowns and the recent threats to income sharing, it is very easy to feel that the dice are stacked against freelancers. There have, however, been positive developments around the subject of pensions planning that can dramatically reduce the tax take a contractor must bear. Since the ‘A-Day’ pension reforms of 2006 the link between salary and allowable pension contribution has been largely broken. Some umbrella companies now offer the ability to divert part of your contract income into a pension via what’s known as a salary sacrifice arrangement. Salary sacrifice presents a very tax efficient way of transferring funds from contract and into personal hands because it reduces the taxable gross on which you are liable for income tax and national insurance contributions. The same tax break applies to those contractors using a limited company with the tax-break really coming into its own for those who are caught by IR35. In reality your ability to exploit salary sacrifice will be determined by your current day-to-day income needs but contractors who have a second wage, working spouse or investments with which to meet the bills may literally be able to reduce their take-home pay to virtually nothing. The umbrella or your limited company then pays your remaining earnings into a pension without deduction of employees' and employers' NI and with no income tax or benefit in kind liabilities. Whilst skillfully avoiding the taxman's grasp, these diverted funds can also represent a potentially very significant boost to a contractor's future retirement income. In addition you can personally invest up to 100% of the remaining salary that you take although you may pay some national insurance on this income. Making a virtue of the current stock market Many thousands of freelancers are already using salary sacrifice to reduce their income tax and national insurance payments and given the current depressed state of the markets they could be investing during what we may look back on as a historic buying opportunity. By adding to an investment on a regular basis you can make a virtue of fluctuating markets because when prices are down you buy more with that month's contribution, compensating you for a previous month when prices where perhaps higher. Then when prices hopefully pick up you have more investment units worth more. We predict that the numbers using salary sacrifice will rise further in the run up to the higher NI and income tax rates in 2011. We recommend that you speak to your Umbrella company today to ask whether they have a salary sacrifice arrangement that you can use and if not ask them to put one in place. This need not be difficult and most payroll packages will allow the calculations to be made. Similarly if you use a one man limited company, ask your accountant how this tax break could benefit you. More on pensions and an enquiry form to find out more about your options here. Nov 26, 2008 Email this article Printer friendly page Previous Page
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