Freelancing to avoid 50% tax rate?

With a new 50pc top rate of income tax coming into force in April 2010, many people who earn more than £150,000 are looking for ways to minimise the impact of the increase.

Attention has recently been drawn eo BBC presenters opting to be

"freelancers" to save tax. 

Some new arrangements have appeared, some of which may work if people become freelance or set up a service company, and others that may even work with flexible working conditions, for example:

• It may be possible to advance payments of salary and bonuses providedthey are paid before April 6 2010.
• Taking an interest-free loan could defer a liability, especially if income is likely to reduce in later years. 
• Salary-sacrifice schemes, such as asking for a salary to be paid into a pension scheme, might be used to reduce taxable income, but unfortunately, high-earning individuals are unlikely to be able to set up new schemes.
• There are ways to reward employees through share option schemes on which capital gains tax (CGT) is paid at 18pc as opposed to 50pc.

All those options are complicated and require a "flexible" employer.

So, if self employment as a freelancer is possible, what is available?

First, high-earning individuals classed as ''freelance'' for tax
purposes have different opportunities to delay paying the new 50pc tax
rate by, for example:

• Changing their accounts year end to March 31.Anyone with an accountsyear end of April 30 will already effectively be paying tax at 50pcfrom May 1 this year on income above £150,000.
• Any forthcoming expenses can be delayed and claimed after April 6 next year.
• A less prudent approach to bad debts might be taken in the last accounting period ending prior to April 6 next year and a realistic approach taken later.
• Self-employed individuals have more scope than employees to claim a tax deduction against income for travel and office expenses and other business-related expenditure.
• Also, freelancers usually hire an accountant (tax deductible) to prepare an annual statement of income and expenses.

There is no substantial saving for individuals for National Insurance Contributions (NICs) as they are roughly in line for employees and self-employed. 

However, employers, by designating an individual as freelance rather than staff, can avoid paying NICs, now levied at 12.8pc of salary. Employers will also avoid sick pay and assisting with pension provisions for ''staff'' treated as freelance.

Others go further and set up a service company. This provides the
services of an individual through an intermediary company, in which
the individual is the controlling shareholder or director.

The contract for services is therefore between the contracting company
and the service company. The main advantage is it enables the service
company to shelter the individual's earnings, which are then extracted
in the most tax-efficient way - often through dividends, taxed lower than employment income and not subject to NICs.

In the run up to next year's tax increases, company directors will no doubt consider maximising the salary and dividends taken out of the business before April 6, thereby paying tax at 40pc and 32.5pc, rather than at 50pc on income over £150,000 and 42.5pc on dividends after April 6 2010.