Contractor Pensions Opportunities
There are some great contractor pensions opportunities.
Andrew Gains from IFAs ContractorFinancials points out that Contractors can get a head start on 2008/2009 pension planning opportunities.
Since pension simplification came into force in April 2006 there is now an enormous degree of flexibility to retirement planning.
What can we invest?
Just about anyone can invest £3,600, or up to 100% of salary each year. That’s as a personal contribution from private funds. So, parents or grandparents can even invest for children and still gain tax relief on the contributions.
Where Contractors really get to exploit the tax rules is when looking at employer funded contributions via their ‘one man limited company‘ or Umbrella Company. So, investment via the ’employer‘ is, in nearly all cases, limited only up to the annual allowance. This currently stands at £225,000.
One Man Limited opportunities
So, for contractors who operate One Man Ltd companies there is a real incentive to utilise this greater freedom. Any money, therefore, that you divert into a pension will avoid personal taxes normally put against salary or dividends. You can offset pension contributions as a business expense thus avoiding corporation tax.
In a post MSC, IR35 and income sharing world, therefore, you could argue that pension investment represents one of the few remaining areas of tax planning the authorities actually encourage. Moreover, it 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 set-ups, which typically operate outside IR35, who can benefit. Any contractors who use an umbrella company for PAYE may well be able to take advantage of a salary sacrifice arrangement to massively reduce their tax bill.
Ask your Umbrella Company to put in place a salary sacrifice scheme. This allows the ’employer‘ to transfer funds directly from your contract income into a pension scheme. Crucially this transfer occurs before you deduct the Employers or Employees National Insurance and Income Taxes. Even for a basic rate taxpayer, this could save a 39% tax take. Higher rate taxpayers save even more.
Tax saved today and an income for tomorrow
The importance of having an income in retirement is much higher up the agenda in recent years. It is now one the key concerns for the Government and public alike. There will be immense problems with the state pension in years to come. That’s 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. This is the reason why, when all other tax breaks come under pressure, they have left open the pension planning route. Indeed, since simplification in 2006, they have even enhanced it with these new higher limits on investment and far greater flexibility at retirement.
Make sure you take advantage of your contractor pensions opportunities.