IT Contractor Mortgages and Pensions

Contractor pensions offer a great opportunity to reduce the amount that you pay in tax. There is still time to act before the pension tax relief rules take effect April 6th 2011.

After you have drawn enough salary and dividend income to meet day to day needs, an employer contribution into your pension can offer you a means to reduce or avoid altogether the corporation tax that your company is otherwise liable to pay on any excess profit.

Alternatively you can draw extra dividends and make the pension contribution personally, gaining income tax relief in the process. However, via the personal route you can only invest a maximum of 100% of what could very well be a low salary, whereas a company investment has no link to salary.

You need to bear in mind that once invested, pension monies are largely inaccessible until you reach 55 but depending on your circumstances, you can potentially invest up to a massive £255k until April 5th.

Any sum invested could not only make a potentially significant difference to your retirement fund but will also have allowed you to transfer money from company into personal hands in a tax efficient manner.

Make hay while the sun shines

It is unlikely that contractors will ever be able to invest anything like this amount of money into a pension in one tax year ever again because from 6th April 2011 a new annual allowance of £50k will apply.

You should also be aware that complex 'input period' rules may already apply to them which mean that they will already fall under the new annual allowance.

In certain circumstances there do seem to be steps that can be taken before 5th April to change the dates that determine which allowance applies to contributions you make in 2010/11 however.

You could also consider investing in an ISA before the tax year end as these tax efficient wrappers currently allow an investment of up to £10,200 of which up to £5,100 can be in cash.

Unfortunately, ISAs must be funded from post-tax income so won't help soften the blow of those tax bills next January. You won't be charged tax on growth in your portfolio however, which over the long term could help ensure you keep more of any profits you make.

As there are few remaining tax breaks available to freelancers you should grasp the opportunity to invest in your pension if at all possible because not only will it make all the difference to your tax take this year, it will also ensure that you put some of your hard earned contract income away for the future.

Contractor Pensions

If you would like to find out more about your pension options (or anything else financial), simply contact Contract Eye's long term IFA partner, Contractor Financials, via our contractor pensions page.