Pension Contributions for Contractors operating through a Limited Company
For many contractors, tax is the largest single issue you have to deal with. A pension investment allows you to reduce the amount of tax you will pay next January but you need to act before April 5th.
For many self-employed contractors, 31st March is also the end of company tax year, which overlaps conveniently with the financial year end on 5th April 2012. Making the correct decisions prior to 5th April enables you to potentially save large amounts of company tax and personal tax.
Most contractors will draw a low salary and sufficient dividends to cover their day to day requirements before having to settle their corporation bill. However, a contribution into a pension from your Limited Company will allow you to substantially reduce your corporation tax bill.
How much can I Contribute?
Due to the large tax breaks linked with pension investments, we are constantly asked “how much can I contribute in a given tax year”. We’re delighted to inform you that funding a pension through your Limited Company allows you to contribute up to £50,000 per annum.
Pension Summary:
- Pension contributions paid by your Limited Company are one of the best ways to reduce Corporation Tax. The contributions are treated as a tax deductable expense to your business.
- The new pension “Carry Forward” rules allow contractors to contribute any unused annual allowance from the previous three tax years. Providing a fantastic tax planning opportunity to those contractors that have accumulated large retained profits in their business.
- Contractors with their own limited company should endeavour to make gross company pension contributions before the end of their company tax year.
- The maximum individual life time allowance for a pension scheme is £1.8 million in 2011/12. This limit will be reduced to £1.5 million from 6 April 2012.
- Contracting in/out of the second state pension (S2P): For most contractors who pay a relatively low salary (e.g. £7,000), it is beneficial to be contracted IN, to the S2P. The reason is that you receive a top up to your basis state pension (called an additional state pension) based on earnings of £14,400 (called the Low Earnings Threshold).
With so few tax breaks available to contractors, we encourage you to take advantage of this opportunity before April 5th, not only for the tax relief but also to ensure that you have put aside savings for your retirement.
We have included below a Simple Guide to End of Year Tax Planning which you can download as a PDF document.
If you want to understand more about what your options are for setting up a flexible contractor pension please contact us on 0208 421 7999 and we will arrange for you to speak to a contractor pension specialist.
