Reduce your tax bill today and invest for tomorrow with a flexible, low cost Contractor pension.
Contractors with their own limited company can receive substantial tax cuts by investing in a pension while at the same time accruing a pension fund, which you can start drawing an income from at age 55.
Pensions Rule Changes
The whole pension regime has been liberalised since the so-called A-day in April 2006. For contractors with a limited company this is good news, as the flexibility this brings to pension planning investments is substantial. You can now fund your personal pension direct from your limited company income and there are no longer any restrictions to the contributions you make, limited only by the annual tax relief allowance which currently stands at £245,000.
‘Pre-Taxed’ Contract Income
Through your limited company you can now contribute ‘pre-taxed’ contract income into a pension scheme avoiding personal and corporation taxes. If you’re a contractor paying higher rate tax, instead of declaring your gross income as company profit and drawing it as a dividend, you can instead place the same amount directly into a pension. Funds diverted into a pension scheme will avoid personal taxes normally levied against salary or dividends
Dividends Vs Pensions
Let’s take for example a contractor working through a limited company, outside of IR35, who is a higher rate tax payer. If you’re following your accountant’s advice you’ll be taking a minimum salary and drawing the remainder of your contract income in dividends.
For every £100 of gross profit, you first pay a corporation tax of 21% (£21) leaving a potential dividend of £79. Then you pay an additional 22.5% personal income tax on the dividend, which takes a further £17.78 leaving you with only £61 to take home.
Alternatively, if the gross profit is diverted into a pension, rather than taking £61 now, this would mean that the whole £100 goes into a pension fund. However, in reality, the £25 portion of your contribution represents the part of the pension fund which you are permitted to take tax free on retirement. £36 pounds of this gross profit also goes into the pension scheme, along with the £39 that the taxman would have benefited from. This £75 pounds will be able to grow and at a later date, be used to skim off an income or buy an annuity.
So by diverting your company gross profit into a pension you benefit from getting 39% tax relief.
Annuities, Skimming and Inheritance
Contrary to what you hear you don’t have to buy an annuity until you reach the age of 75. Until then you are allowed to skim a certain portion from your pension as income. In the unlikely event that you should die before you reach retirement and have not taken out an annuity, the entire pension fund can be transferred as an inheritance
To contact Freelancer Financials please use our Contractor pension advice form or contact John Yerou on 020 8421 7998
If you are interested in learning more you can also read our overview of Contractor pensions
Contractor Pension advice by Freelancer Financials.
