Contractor Mortgages Contractor Pensions Contractors

With the tax-year end fast approaching Tony Harris from our long-term partner IFAs Contractor Financials points out that Contractors still have a few weeks to take advantage of late pension planning opportunities.

To find out more about your own personal pension options, simply fill in our IT contractor pension enquiry form.

Tony says that contractors could be missing out on one of the few non contentious tax breaks still available. Money can be invested from both your personal and business bank accounts and an effective rate of tax relief of up to 48% can be exploited in certain circumstances.

How much can we invest?

Since pension simplification came into force in April 2006 an enormous degree of flexibility has been added to retirement planning. This flexibility suits your needs as a contractor perfectly.

Almost anyone can personally invest £3,600 irrespective of salary and parents or grandparents can even invest for children and still gain tax relief on the contributions. Personal contributions to pensions over this £3,600 must be supported by a salary of at least the same level of the investment but where contractors can really exploit the tax rules is when looking at employer funded contributions via their 'one man limited company' or umbrella company.

Investment via the 'employer' is, in virtually all cases, limited only by an annual allowance which currently stands at £225,000.

One Man Limited opportunities

For contractors who operate One Man Ltd companies there is a very real incentive to utilise this greater freedom - any money that is diverted into a pension will avoid personal taxes normally levied against salary or dividends, there is no benefit in kind issue to worry about and pension contributions can be offset as a business expense thus avoiding corporation tax.

In a post MSC, IR35 and income shifting world it could be argued that 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.

Umbrella Company opportunities

It's not just Ltd company Owner-Directors , who typically operate outside IR35, that can benefit.

Any contractors who use an umbrella company may well be able to take advantage of what's known as a 'salary sacrifice' arrangement to massively reduce their tax bill.

Your umbrella company can put in place a salary sacrifice scheme which allows the 'employer' to transfer funds directly from your contract income into a pension scheme. Crucially this transfer occurs before the Employers or Employees National Insurance and Income Taxes have been deducted which, even for a basic rate taxpayer, could save a 39% tax take. Higher rate taxpayers save even more.

Choosing the best provider

As a contractor you need a pension that can be as flexible as you are, with the ability to adapt payment schedules to match your contracts on literally a monthly basis.

Given the very long term nature of most pension investment it is vital that you also carefully consider the choice of pension provider. Picking a firm that has a good track record for performance but which is also big enough to remain a serious player in the pensions market should minimise the risk of takeovers and mergers and help ensure that you get the long-term commitment to the product development that is necessary for what could be a 20 or 30 year investment.

An Independent Financial Adviser should be able to help you choose the correct pension and provider but it is imperative that he or she understands the reality of your life as a freelancer. Your unique employment status dictates that paying hefty up front fees is unlikely to be worth any longer term reduction in ongoing costs because you could only be contributing into your pension for a relatively short time before returning to a permie role for instance.

Tax saved today and an income for tomorrow

The importance of having an income in retirement has really climbed up the agenda in recent years and is now one of the key concerns for the Government and public alike. The state pension is going to be under immense pressure in years to come as the realities of an ageing population and shrinking workforce begin to bite.

Politicians of all parties support the notion of personal responsibility for provision of income in retirement and this is the reason why, when all other tax breaks come under pressure, the pension planning route has been left open. Indeed since pension simplification in 2006 it has even been enhanced with these new higher limits on investment and far greater flexibility at retirement.

The credit crunch and pensions

It could be strongly argued that current market lows present a once in a lifetime buying opportunity and it is not too late for you to invest in a pension before the end of the tax year.

In these uncertain times, it can be tempting to neglect your pension contributions in favour of keeping the cash in your pocket but it is worth remembering that there is no more tax efficient method of transferring money from contract into personal hands. Salary or dividends hand a significant cut of your hard earned contract income to the taxman whereas a pension avoid all such deductions and will eventually provide an income for your entire retirement - a worthwhile lasting legacy of your time contracting.

About the Author

Tony Harris is Managing Director of Contractor Financials, Independent Financial Advisers specialising in offering timely, jargon free financial advice to Contractors.

To contact Tony please feel free to use our IT contractor pension advice form.

You can also read our overview of IT contractor pensions.