How IT contractors could benefit from investing in a pension
Posted Mar 30, 2012
This overview of contractor pensions was written in association with Contractor Financials.
Should you wish to find out your personal options right away, simply fill in the enquiry form at the bottom of this page.
Contractor pensions - an introduction
If you don't have an existing pension, or don't make the most of the current allowances, you could be paying significantly more tax than you need to. Pensions are an important weapon in the contractors' armoury whether or not your work is caught by IR35 or not, as they represent one of just a few remaining tax breaks.
There are two ways to invest; personally (from your own funds), or via your company. If your contracts are caught by the IR35 rules, you will automatically reduce your personal tax liability, but also avoid paying employers' and employees NICs.
The amount of tax relief can be as high as 49% - so you pay £51 for each £100 invested. The taxman pays the remainder.
If you are not caught by IR35, you can transfer funds from your limited company to you personally via the pension. This sum will be free of income tax, and will also avoid the 20% corporation tax liability which would otherwise apply to profits.
Since the 2006 'A day' pensions reforms, contractors now have the scope to invest within contribution limits of up to £50k per annum, subject to a lifetime limit of £1.8 million (for the 2011/12 tax year).
How to choose a pension provider
If you have decided to make the most of the tax benefits offered by pension investments, you need to ensure that you choose the right pension provider to look after your investment.
You would be wise to steer clear of firms that levy set-up costs at the start. This ensures that your entire contribution goes into your pension - for contractors and freelancers, funding for what could be the relative short-term is a prudent move, as you won't have burdened your investment with upfront charges and other fees.
Ideally, you will find a provider who is familiar with the way contractors operate. The scheme needs to be flexible enough so you can increase, decrease, temporarily suspend, or even stop contributions entirely - even on a monthly basis.
As contractors may also change the business structure they operate under, the scheme also needs to be versatile enough to allow you to contribute whether you're working via your own limited company, an umbrella scheme, or even if you decide to become a 'permie' for whatever reason.
Your scheme should also be hosted with a financially strong and trusted institution. As new entrants to the pensions market come and go, it is important that your provider has a solid track record, based on a long-term commitment to pension investment.
Use a contractor specialist
With over a decade dedicated to looking after the financial needs of contractors, the Contractor Financials team understand how to fully exploit the tax rules and other complications that are little understood by non-specialist advisors, so you can be assured that you'll be in good hands.
The team behind Contract Eye have worked with Contractor Financials since the company was founded, helping hundreds of our visitors with their pension needs.
To discuss your pension options in more detail, simply complete the pension enquiry form below:
It is important to understand that these investments are longer term in nature and that the value of investments and income from them can fall as well as rise. Past performance is also no guarantee of future performance.
IT Contractor Pension Enquiry Form
The value of investments may rise as well as fall and past performance is not a guide to future returns.
Financial advice is provided by ContractorFinancials which is a trading name of Contractor Financials Ltd which is regulated and authorised by the Financial Services Authority. FSA Registration No: 207478
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