A new amendment to the Income Tax Earnings and Pensions Act of 2003 will close a loophole which some freelancers on the contractor payroll may have used to avoid or defer income tax or National Insurance Contributions (NICs). Henceforth, HMRC intends to tackle all arrangements, including trusts, that are aimed at offering tax-advantaged alternatives to saving beyond the allowances permitted in a registered pension scheme.

The government has been alerted to the fact that some third party arrangements seek to disguise remuneration by claiming that an employee has no legal right to a sum of money under the structure of the agreement, when in fact he or she may be enjoying the full benefits. The targeted arrangements seek to argue that NICs and income tax will only be due on the sum provided during the employment period, rather than on the full value of the assets.

The new legislation will come into effect on 6th April 2011, and aims to ensure that – other than specific exemptions – all rewards, recognitions or loans earmarked for an employee’s benefit, whether current, former or prospective, will be eligible for income tax and national insurance contributions. The exemptions include registered pension schemes, ordinary commercial transactions and approved employee share schemes. The HMRC website contains an explanatory note as well as details of the draft legislation.

Contractors working for a PAYE umbrella company may be unaffected, but other freelancers may wish to consult a qualified contractor accountant for advice.

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