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Umbrella Contractors need to plan to avoid 60% Tax in 2010

17th November 2009

For those Umbrella contractors with gross income (Including dividend income) over £100,000 from the April 2010 tax year and beyond, they 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 tax 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 if your monthly earnings indicate after12 months you would have reach 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 than 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 reduced 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.

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