IR35 - How to shelter your profits from the taxman

One of the most important expenses allowable under the governments new IR35 regulations are "any employer pension contributions made to an approved scheme which are allowable under normal rules". This means, Personal Pension Plans and Executive Pension Plans or the more sophisticated Self Invested Personal Pensions (SIPP) and Small Self Administered Schemes (SSAS).

If you are effected by IR35, then you could be paying up to 46.5% in tax and employer National Insurance contributions. If you have already covered your income requirements, then why pay more tax and NI than you need to? Keep the income and the tax by sheltering it in a pension plan that suits your particular circumstances.

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IR35 - What does this mean to you?

IR35 is a new piece of Government legislation which effects service companies, that is, Limited Companies who offer their services to a third party under a set contract.

Previously, these service companies could maximise their earnings by paying themselves a reduced salary with dividends making up the balance of their income. The purpose of the new rules is to remove the opportunities for the avoidance of tax and Class 1 National Insurance Contributions by the use of service companies, where otherwise, the worker would have been classed as an employee of the client.

It is your responsibility, not that of your clients, to check whether the new legislation applies.

Example

John Smith, a single male, is a computer contractor, employed by his own company, Smith IT Services. In the 2000/2001 tax year, a salary of £35,000 was drawn, having previously calculated that the net income derived from this is at an acceptable level. PAYE and NIC's on the monthly salary have been operational as it was deemed beforehand that the engagement falls foul of the IR35 regulations. An additional £10,000 was received by the service company in that tax year for relevant engagements and must be allocated between salary and employers NI. As this further payment of salary takes Mr Smith into the 40% tax bracket, the net receipt after deduction of tax and employers NIC's is £5,350. Therefore, the marginal rate of tax being paid by Mr Smith is, in effect, 46.5%.

On total company receipts of £50,000, Mr Smith receives net income of £26,943.10 (i.e. less than 60% of earned income).

IR35 - How can we help?

The following expenses are allowed to be deducted from payments in respect of relevant engagements in calculating whether any deemed payment is required.

• All expenses otherwise eligible for deduction under normal Schedule E expenses rule
• Any employer pension contributions made to an approved scheme
• An additional flat rat 5% of the gross payment of the relevant contract
• Employers NIC's paid during the year, plus any due on the deemed payment

Taking the example of Mr Smith further, Smith IT Services could pay a pension contribution to either a Personal Pension (PP) or Executive Pension Plan (EPP) , resulting in 46.5% tax relief on the contribution.