You may never have considered investing in a pension, or may have put of the urge to find out more about saving for your retirement for a rainy day. However, pensions represent one of a dwindling number of ways to minimise your exposure to tax as a contractor, which could benefit you right away.
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 directly to your personal pension (a legitimate business expense). This sum will be free of income tax, and will also avoid the 19% Corporation Tax liability which would otherwise apply to profits.
Pension tax-free allowances
This annual allowance for pension tax relief is currently £40,000 (2018/19).
The lifetime allowance for pension contributions is currently £1m, having been cut from £1.25m from April 2016.
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.
Please use this article as a guide only. You should seem professional advice while evaluating your pension options.