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How umbrella company contractors can avoid 60% tax

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Freelancers. contractors and interim professionals working through umbrella companies need to plan to avoid 60% tax in 2010.

From 6th April next year, individuals earning a gross salary above £100,000 a year will lose their personal allowance (currently £6,475 pa) at a rate of £1 for every £2 of taxable income above that £100,000 threshold.

Thus for every £2 of earnings, you will lose £1 of your personal tax allowance and by the time your earnings reach £112,950, your personal allowance will be zero.

Here are some examples of how the tax changes may affect you from April 2010 onwards:

1. 60% - After £100,000 of earnings you lose your £6,475 allowance at a rate of £1 per £2 of extra income earned. Thus for every £2 earned you are taxed as if you earned £3 - therefore 40% tax becomes 60% tax i.e. Two x £6,475 is £12,950, therefore this 60% tax rate stops at £112,950.

2. 53 % - This is the average tax on earnings between £100,000 and £120,000

3. 49% - This is the average tax on earnings between £100,000 and £130,000

4. 46% - This is the average tax on earnings between £100,000 and £140,000

5. Once earnings are over £150,000 you are taxed 50% on the element over £150,000, plus you will have lost your personal allowance.

It is important to note you will be charged from Month 1 of the tax year (April) at that estimated tax rate. So if your monthly earnings indicate after 12 months you would have reached the threshold i.e. If you earn £8,333 per month in April 2010, HMRC will assume your earnings will be £100,000 plus per annum and thus you will begin to lose your personal allowance from Month 1.

How to Overcome this

It is now more important that ever to plan efficiently when taking tax into consideration. If you are affected by these new tax levels, we would recommend you consider personal pensions as a part of your tax planning.

If you make a personal contribution to a registered pension scheme that reduces your taxable income to the £100,000 threshold or below, the contributions will provide you with income tax relief on that contribution amount and you will therefore still be eligible for the personal allowance.

If the contributions are made via the salary sacrifice, you may also benefit from tax relief on the employers and employees National Insurance contributions.

If you require any additional information or assistance in your tax planning, please contact Carrington Accountancy.

Story by Carrington Accountancy

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.
Image: Saving is for wimps! by woodleywonderworks

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