Contractors triumph in pre-budget report!

Darling's pre-budget report was released last month to a resounding cheer from the Contractor community. Issues such as income sharing and umbrella expenses are to be put on hold at least whilst the threat of an imminent tax rise has been diminished in a bid to save the economy from potential melt down.

Planet Contractor reports on the key issues raised by the pre budget report and how Contractors can benefit from the changes

Britain was waiting with baited breath to hear how Alistair Darling proposed to get the economy back on track in his pre-budget report.

By far the greatest triumph for Contractors operating a one man limited company was the news that the proposed corporation tax hikes that were due to come into force in 2009 have been abandoned to try and help the small businesses that are most at risk from the recession.

This means that your corporation tax will remain unchanged for 2009 and you will also be given longer to pay your HMRC tax bills if you are having difficulty. Companies that are struggling to pay their tax bills will be given more time as the new HMRC Business Payment Support Scheme is set up to provide small businesses with a payment timetable they can afford.

Contractors operating under an umbrella

Umbrella companies seem to have been in the firing line for various HMRC attacks recently, but there seems to have been something of a ceasefire in the pre budget report.

Darling has put plans to overhaul the way in which umbrellas handle expenses on the back burner and concentrate on the more important issue of saving the British economy. In this surprising turn around, HMRC are set to miss out on an estimated £300m in taxes that would have been gained from going ahead with their previous plans.

This is great news for those contractors operating through an umbrella as the expenses arrangement remains unchanged for the time being.

Other key benefits from the Pre-Budget report

Changes to the income shifting rules, whereby Contractors are able to pay lower tax by splitting dividends between taxpayers, have been put on hold for the time being. However, Darling warned that this will only be a temporary fix and that plans are still in place to readdress the issue in the future.

In an attempt to breath life back into the High Street in the run up to Christmas, VAT has been cut by 2.5% to just 15% which should help to lower the price of presents this year.

In the housing market, banks have agreed to for 3 months before repossessing a home if the borrower has fallen behind on their repayments. This should offer temporary respite for those homeowners that are currently struggling to meet their repayments.

How will the Treasury pay for these changes?

Whatever money is paid out now must be recouped somehow in the future in order for the books to balance in the long term. Unfortunately for those on higher incomes Darling has employed what some have referred to as the 'Robin Hood' approach to budgets. He proposes to take from the rich with a 45% income tax rate on earnings of £150k and over from April 2011. In the same year, employee, employer and self-employed rates of national insurance will increase by 0.5%.

In order to avoid falling fowl of the increases, Contractors should consider paying more into a pension. If you work through an umbrella company then you can take advantage of a salary sacrifice scheme which allows you to take as little as the minimum wage whilst paying the rest of your income directly into a pension. This cuts your tax and national insurance dramatically as you only pay on the salary that you take. The same applies to those Contractors using a limited company with the tax-break a virtual necessity for those who are caught by IR35.

Whilst it may be impossible to sustain taking such a low wage over a long period of time, the tax breaks available can provide a significant boost to your retirement fund that you are unlikely to be able to replicate at any other stage in your life. Many Contractors are already taking advantage of salary sacrifice and it is predicted that this number will increase significantly once the tax rates increase in 2011.

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