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Freelance contractors could force themselves into higher tax when NICs and Dividend Tax rates rise in April

Freelance contractors working through their own PSCs must avoid being penny wise and pound foolish or could force themselves into higher tax rates.

Freelance business owners should consider their overall business position and not just focus on the additional National Insurance or dividend tax rates which are due from 6 April onwards when deciding what amounts they should be withdrawing from their business.

While there is a natural temptation for freelance contractors to pay themselves a bonus or take additional dividends from the business prior to 6 April, in some cases this could result in them facing additional income tax liabilities which exceed any saving in NICs.

Freelance contractors working through a PSC need to consider their overall income position and the wider finances of the business, rather than simply focusing on the additional NICs, or dividend taxes, which will be payable from 6 April 2022 onwards.

A freelance business owner who presently takes out £50,000 per annum as their ‘standard drawings’ from their PSC, might be tempted to award themselves an extra dividend or bonus at the end of March to avoid the increased NIC and / or dividend tax liability.

However, a payment of say £10,000 could result in the freelancer becoming liable to the 40% income tax band, if the drawings from the business were taken as a bonus or salary on the majority of the additional sum withdrawn from the business. In this scenario, they could be increasing their overall tax costs by more than would be the case if they simply waited and drew money from the business on their normal, monthly basis.

Taking dividends from a PSC at the ‘wrong time’ rather than salary or a bonus could trigger the same basis issue – i.e., it could in some cases drive the freelancer into higher cumulative tax bands than would otherwise be the case.

While it may be appropriate for freelance contractors to increase their pay or dividends from their PSCs before 5 April 2022 in some cases, it is important for individuals to understand their wider tax position and the wider needs of their business before making any formal decisions in this regard.

Would you like to know more?

If you would like to discuss the above or how it may affect you and your business, please get in touch with Robert Salter or your usual Blick Rothenberg contact using the details on this page.

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