Why is it important that you consider a pension? After all, you’re healthy, young and making loads of money. Aren’t pensions for elderly folk? Not at all.

Pensions for contractors can reduce your tax bill substantially as well as providing a retirement income for your future. Pensions will not only save you money today, because of the enormous tax breaks, but will also provide you with a lot more money for when you do retire.

Important Facts about Pensions for Contractors:

• Contactors with a limited company are able to contribute “pre-taxed” income into a pension avoiding personal and corporations taxes

• Contractors can now fund their personal pension from limited company income and there are no longer any limitations to the contributions you make, apart from the annual tax relief allowance which is currently £245,000.

• Pensions needn’t be about putting money aside to purchase an annuity. You can take 25% of your pension savings as a tax free lump sum providing you are over 55.

• Since April 2006 (dubbed A-Day), you no longer need to purchase an inflexible low value annuity, instead the funds can be left invested and you need simply draw an income from the pension pot each year.

• Up to the age of 75 your pension savings can be passed on free of inheritance tax to your surviving family provided you’ve not purchased an annuity.

• Pension fee charges have reduced considerably. Stakeholder pensions are ideal for contractors in the UK who are eager to save for retirement, secure in the knowledge that they won’t be charged excessive fees.

• You can choose from over 100 funds to invest in and your pension fund grows free of income tax and capital gains tax.

• Pensions represent the most tax efficient method of transferring money from your limited company into your personal hands.

• This would obviously represent a very tax efficient method of transferring funds from company into personal hands.

• You can now make contributions into as many different pension plans as you like

Pensions for Contractors - Save You Tax

The fundamentals are clear and simple. Generally you pay tax on your income. When part of this income is diverted into a pension, you save most of the tax you would generally pay in to it. So, if you haven’t already considered setting-up a pension, you’re probably paying a considerable amount of tax that you could otherwise be avoiding. And for those contractors that are caught be IR35 the tax savings are even greater as you save on the employers and employees national insurance contributions. Depending on your personal situation the amount of tax relief can be as high as 48%.

How Tax Relief Works

If you are a one man limited company contractor and are a higher rate tax payer working outside of IR35 tax legislation, your accountant would have probably advised you to take a low salary, and the rest of your contract income taken in dividends. If not, you need to look for a new accountant.

Let’s take the following example where you draw £100 of company gross profit. Initially you have to pay corporation tax of 21% leaving you with a dividend payment of £79. This is followed by an extra tax on the dividend of 22.5%, leaving you with exactly £61.22 take home. Putting it simply, you’ve just paid the Inland Revenue £38.78 for the benefit of taking home £61.22.

Now here is how a pension can cut your tax bill substantially. Instead of drawing the £61.22 as dividends, your limited company can contribute £100 towards your personal pension fund. Essentially £25 of your contribution equates to the portion of the pension fund which you can take tax free when you are retire. The £38.78 that would have gone to the HMRC together with the balance of £36.22 (£75 in total) is also added to the pension fund to grow and be worth substantially more.

In other words the tax relief you get by diverting your company pre-taxed profits into a pension is 38.78%. This is the percentage tax saving (38.78%) you can redirect into a personal pension rather than the Inland Revenue.

Tax Savings and Income in Retirement

Pensions are still one of the few remaining areas of tax planning still actively supported by the government. The government are constantly looking at incentive schemes that will encourage individuals to save more money in personal pension schemes. The government knows that on its own, the State Pension scheme is insufficient as a single source of income, and therefore the government does what it can to make personal pension investment as attractive as possible by allowing these substantial tax breaks. The government knows that the key incentives to self-employed workers with a limited company are attractive tax breaks.

New Pension Rules for Higher Earning Contractors

Contractors need to be careful to avoid the new rules that were introduced following the April 2009 Budget. Contractors that now receive over £150,000 per year are unfairly going to have their tax relief gradually reduced. For those earning between £150,000 and £180,000 the tax relief will gradually be reduced from 40% to 20%. The anti-forestalling rules are complicated and we recommend that you seek professional advice from a pension expert if you are one of those contractors affected.

Drawing your pension after 75

Up until April 2006 when you got to age 75 you had to buy an annuity with your pension fund. This is still the rule but there is now an alternative option, Alternative Secured Pension (ASP). An ASP behaves similar to an Income Drawdown that permits you to invest your pension savings from your pension and draw an income stream within laid down limits as agreed in the terms of the ASP.
Although annuities bring a guaranteed income until your death, enabling you to also transfer to a designated spouse or dependant, after your death the fund is lost to the annuity provider. However, an ASP permits you to pass possession of any leftover funds after your death to another person.

Sadly, the government of today made a quick u-turn after April 2006, making ASPs less appealing. ASPs are now subject to taxes; this is because they are classed as part of the estate, meaning that if you pass on any leftover funds on death to other members such as children and grandchildren, they will subject to income tax  and possibly inheritance tax too.

Even with the tax implications ASPs can still offer benefits, they still provide investors the flexibility to draw and manage their money in retirement.

Choosing a Provider

Due to your contractor status you need a pension that is completely flexibility to raise, reduce, suspend, restart and freeze contributions. The plan needs to be adaptable taking in to account that one day you could return to permanent employment.

How Can I Get A Contractor Pension?

Talk to Freelancer Financials, who are specialist in the field of providing financial advice to contractors.

For more information you can also read our overview of Contractor pensions

For a pension quote please contact our pension’s specialist Ralitsa Bargazova on 020 8421 7998

Contractor Pension advice by Freelancer Financials

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

To contact Freelancer Financials please feel free to contact our pension’s specialist Ralitsa Bargazova on 020 8421 7998

Contractor Pension advice by Freelancer Financials.

With the tax-year close approaching Ralitsa Bargazova from Freelancer Financials points out that Contractors still have time to take advantage of pension planning opportunities.

Ralitsa says that contractors and freelance workers may be loosing out on one of the few non contentious tax breaks still available. Cash may be invested from either your business or personal bank accounts and an effective rate of tax relief of up to 48% can be exploited in certain financial situations.

Are you making full use of the tax allowances available to you?

Since the simplification of pensions was introduced in April 2006 “A Day” a significant amount of flexibility has been added to pension investment planning. These changes are very conducive to the financial needs of contractors as investing in a pension can reduce your annual tax bill substantially.

Pensions are still one of the few tax breaks available to freelance contractors. As well as providing an income for your retirement, it is still by far the most popular tax efficient mechanism of extracting funds from your business today.

They represent one of the few remaining tax breaks available to contractors.

How much can I invest in a pension plan?

It doesn’t matter whether you are inside or outside of IR35 pensions for contractors are good news because you can divert income from your company into a pension avoiding lots of taxes.

Nearly everyone can personally invest £3,600 irrespective of salary and get tax relief on the contributions. However, personal contributions made into pension plans over £3,600 must be supported by a salary that is at least equal to the level of pension investment in order to receive tax relief. In the case of contractors operating through their Limited Company, tax relief on contributions made into pensions are limited only by the annual allowance which is now £245,000 but will be raised to £255,000 in April 2010.

Important news for Contractors operating through Limited Companies

• Funds that are diverted into a pension will avoid personal taxes normally levied against salary or dividends.

• There is no benefit in kind issues

• Pension contributions can be offset as a business expense thus avoiding corporation tax.

You can make pension contributions directly from your limited company saving you considerable amounts of both corporation tax and personal tax.

Pension investment represents one of the few remaining areas of tax planning actually encouraged by the authorities and is a very effective means for a contractor to cut the tax take he/she suffers.

Tax savings and Income in retirement

Pensions are one of the few areas of tax planning actively supported by all Political parties. The authorities are in favour of the concept of individuals taking on responsibility for the provision of income in retirement and will do what they can to encourage it including tax incentives for “one person limited company” contractors and self employed workers. So when all other tax breaks go under the spot light, the pension avenue is left wide open. In actual fact, since “A Day” in 2006 it has even been improved with new increased limits on investment and far greater flexibility at retirement.

The financial crises and pensions

In these difficult times it is all to easy to put aside our retirement plans in order to prioritise our cash flow. It as also worth remembering that there isn’t a better tax efficient way of diverting income from “contract” into personal hands. As your accountant will tell you, keeping your salary and dividend drawings to a minimum reduces the erosion of your hard earned contract income to the taxman. Alternatively by diverting contract income into a pension avoids such deductions and has the added benefit of providing an income for your retirement.

To contact Freelancer Financials please feel free to use our Contractor pension advice form or contact Ralitsa Bargazova on 020 8421 7998

For more information you can also read our overview of Contractor pensions
To contact Freelancer Financials please feel free to contact our pension’s specialist Ralitsa Bargazova on 020 8421 7998

Contractor Pension advice by Freelancer Financials.

Perfect time for Contractors to start a pension

There couldn’t be a better time for contractors to start a pension, with each pound invested now buying a lot more shares than it would have done a year ago.

Those contractors that are years away from their retirement age have no need to worry about short term volatility as the financial markets will recover in the medium to long term. With the value of the financial markets at the lowest levels seen in years, freelancers investing in pension funds can expect to get so much more for their money.

Pensions are a great way for contractors and freelancers to invest due to the significant tax breaks available. As a contractor outside of IR35 and who works through their own limited company you can virtually contribute your entire income into a pension directly from your own limited company bank account and claim tax relief on the whole amount. Pensions are the one non-contentious method which a contractor can use to mitigate their tax bill.

Indeed, the government has been pushing all workers to invest more in their private pensions, and freelance contractors working through limited companies in particular can divert substantial sums into their pension funds from their pre-tax income.

If you would like to discuss your pension options further please contact John Yerou at Freelancer Financials on 020 8421 7998 or alternatively,

please email john@freelancerfinancials.uk.com

Other useful pages to visit: Contractor Pensions

Contact us on Tel: 020 8421 7998