New £10k nil-rate band of little benefit to contractors
Initial Budget day euphoria at the coalition's announcement of a £10,000 starting point for basic rate tax has quickly turned to disappointment as it is clear that yet again most contractors will not feel the benefit, writes Tony Harris, of specialist IFA ContractorMoney.
The new threshold is due to come into effect from April next year, a year earlier than planned and fulfils one of the key Lib-Dem objectives for the coalition. However with limited scope for hand outs across the board, for the majority of professional freelancers, the Chancellor gave with one hand only to take away with the other.
To ensure that middle-earning contractors do not benefit from the fact that a greater proportion of their income is tax free, the basic-rate limit before 40% income tax applies is being reduced further still.
In recent years the threshold has fallen from £37,400 in 2009/10 to £32,010 in 2013/14 and will again drop to £31,865 in 2014/15.
Across the whole population hundreds of thousands of Britons will pay 40% tax for the first time and freelancers will have to be mindful of their salary and dividend strategies as a result.
It will therefore only be the lowest and very highest-earning contractors who benefit from the Chancellor's largesse as those earning more than £150,000 see the top rate of taxation fall from 50p to 45p from 6th April. The restricting of the personal allowance for those earning more than £100,000 still remains however.
With many freelancers managing their drawings to avoid the 40% tax band, the cut in the 40% threshold after initially hearing of the new £10,000 personal allowance will come as a bitter blow. To mitigate what seems like a tax assault from all sides we have seen unprecedented demand this tax year-end for pensions advice.
Pensions still thankfully represent a very effective tax planning tool as, subject to the annual allowance of £50,000, 100% of salary can be invested personally. Any employer contributions still also count towards the £50k annual allowance but have the additional benefit of being free from a link to salary so can represent a very effective means of transferring money from contract to personal hands without HMRC receiving a penny in tax or NI.