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Dave Chaplin, CEO of ContractorCalculator.co.uk offers some strategic tips for freelancers who could lose child benefit in January.
Freelancers who are earning over £50,000 a year and, as a result, have received a letter from HMRC about withdrawal of their child benefit, have until 7 January 2013 to implement a tax strategy to avoid losing thousands of pounds.
Here, Dave Chaplin, CEO of ContractorCalculator.co.uk which provides free online expert advice and guidance to freelancers and contractors, offers some strategic tips.
A freelancer with two children may lose up to £1,752 a year and could face a marginal rate of 54%, rising to 66.5% for three children once means testing is introduced after the 7 January 2013 rule change. This is because the benefit will continue to be paid each month and then reclaimed via income deductions from the member of the household earning over £50,000.
The changes to the child benefit system will result in benefits being incrementally withdrawn once a freelancer is earning over £50,000 of gross personal income a year. Eligibility for the benefit withdrawal is not measured by gross fee income, but by the gross income less charitable donations and pension contributions.
However, by adopting a range of simple tax management strategies, freelancers may be able to both retain their child benefit and make greater tax savings, thus increasing their take-home pay. Strategies to avoid the income tax deductions include:
– Reducing total salary and dividends to below the £50,000 gross personal income allowance, instead building up a cash balance in the company that may be used for company investments or to fund a sabbatical
– Using a company funded pension scheme to soak up earnings above the earnings limit
– Diverting cash into charitable donations that can also be used to keep a freelancer’s gross personal earnings below £50,000.
Because the 31 January 2013 personal self-assessment tax return deadline is likely to consume many accountants’ time during December and early January, it is advisable for freelancers to consult their accountant and/or independent financial adviser as soon as possible to implement child benefit-related tax strategies.
*Dave Chaplin is CEO and founder of ContractorCalculator.co.uk, which has provided advice and guidance on freelancing since its launch in 1999. He has just published the second edition of the Contractors’ Handbook.