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.
Tags: Contractor Pensions