The richest 10% of the UK’s population is set to lose an average 3% of their net income due to the complex tax changes that come into force this April, according to the Institute of Fiscal Studies.

750,000 more people will need to pay tax at the higher 40% rate because the government has reduced the threshold at which this rate takes effect. High earners will also need to pay more national insurance and will face restrictions on the tax free amount they can invest in their pension fund.

Contractor accountants earning over £150,000 now have to pay tax at 50% on all earned income above that amount and those with income above £100,000 have lost their personal tax allowance.

Child tax credit changes will also cause a large increase in marginal tax for the 175,000 adults who earn about £40,000 a year.

It’s not only employees that will be affected by these changes. High earning contractors should make sure they understand how the tax changes will affect them. One of the biggest changes, and one that a lot of people do not seem to be aware of, is the reduction in pension tax relief.

At present an individual can save £255,000 a year in their pension fund and obtain tax relief. As from April, that figure drops down to just £50,000. This new rule could have an adverse affect on people who pile a lot of money into their pension fund as they approach retirement age.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Luxury tax Increase by Señor Codo

When I wrote my piece last week, I was saying I was suffering a little from having to write it before the election result was known. I didn’t think that I would still be waiting when I started putting this week’s one together…

Anyway, it is all settled for now, and it looks like we really are in for some interesting times. Clearly the next budget will not be pleasant for anyone; certainly some of my contacts in the Public Sector are seriously worried about what the future is going to bring. Although if the markets react positively then things should start to move and there may be more work around for everyone

On the other hand, if they change the tax thresholds – something I actually think is a damned good idea – then a lot of contractors are going to have to rethink their payroll policies a bit. Also if the new government deliver their promised Office of Tax Simplification and put IR35 at the head of the list, then we will have something to celebrate.

Elsewhere there was a far more interesting story on the news this morning. A hospital in Nottingham has switched its food supplier to a consortium of local farms, saving themselves several millions a year but cutting out the retail supply layer and many thousands of food miles. The farmers are also delighted; as one said, until recently he was looking at closing down, now he’s making a profit.

Now that’s something the whole of government needs to take notice of. A few years back I proposed the creation of virtual consultancies, who pick up parcels of work that are normally handed out to the big consultancies (who are usually using contractors to do the real work anyway…). The Nottingham hospital is precisely that – ok, using food instead of code, but you know what I mean – then we are truly in a brave new world.

By the way, what do we call the new government? The BBC is sticking with “the Liberaldemocratconservativecoalition”, which is less than snappy. “ConDem” doesn’t sound quite right either.

But one anagram of Lib Dem Tory is “Bye, Mild Rot”, which sounds fairly appropriate…

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Summer Baby by zetson

Carrington Accountancy have come up with a novel way to keep their contractors abreast with the latest changes in legislation and tax planning.

From the start of the new tax year, they will be publishing a “Question of the Month” and providing a detailed explanation on their blog. The question will be based on a subject that is relevant to the limited company contractor, as well as the most common queries that their accountants have received over the previous month.

Commenting on the new service, Operations Manager Mary McDonald said:

“We are always looking at proactive and innovative ways to help educate our clients and help them become more “tax savvy”. Our clients love the idea and look forward to a convenient, quick blog on a useful topic each month which they can retweet to interested colleagues and friends via our Twitter Page”

This is not the first time that online accountants have used the web to provide free advice in a questions and answers format. AccountingWeb have already implemented an online discussion group where readers can ask a tax or accounting related question under their ‘Any Answers’ category. According to the website, there are as many as 90,000 members willing to answer the daily feed of questions, and the addition of the Q&A service has been largely responsible for a surge of new visitors to their site.

Carrington’s first question of the month was about the use of limited company dividends and how these can be used as a tax efficient means of remuneration. Since the majority of their clients are working in the freelance marketplace, they anticipate that the subject IR35 will feature prominently over the coming months, particularly since the Tories announcement to review the legislation if they win the election.

Carrington’s next question of the month – “Why am I not paying any National Insurance in April? You must have made a mistake.” can be found on their blog.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: question mark ? by Leo Reynolds