Contractor Loan Schemes

Have you taken part in a contractor loan scheme? This is a tax saving scheme which was widely sold to workers in personal service industries, such as IT contractors.

To use the scheme the individual would sign an employment contract with an offshore employer, but work for customers in the UK. The individual would often receive a large proportion of their fee for that work as a loan from the offshore employer. They were told the loan was not taxable, except for a small benefit in kind charge on the unpaid interest on the loan, but that's not what the Taxman thinks.

The Taxman has publically announced that he is opening tax enquires into individuals' tax returns for periods during which they have used such loan schemes. In some cases the individual will receive a tax bill for the years 2008/09 to 2010/11, to collect the tax they think they avoided. There will be penalties and interest to pay on any tax found to be avoided.

If you have used a similar loan scheme to reduce UK tax, you should talk to us.

Q. I have volunteered for redundancy at the age of 59 and expect to receive a pay-off worth £60,000. The first £30,000 will be paid free of tax, but i

A. You could ask your employer to divert some of the redundancy payment into a registered personal pension scheme for you. You will not be taxed on this pension contribution as long as your total income for this tax year is not more than £130,000. You also need to have income below this level in the previous two tax years. If your employer is not willing to make the pension contribution, you could make the contribution yourself, but be sure to make the payment in the same tax year in which you receive the redundancy payment. Your pension contribution will be treated as being made net of 20% tax and you can reclaim a further 20% tax relief through your tax return. In both cases, as you are already over 55, you can withdraw 25% of the pension fund value as a tax free lump sum immediately. You should take advice from a pensions expert before embarking on any investment in pensions.