Pension contributions will save contractors money in tax.
Under the existing pensions rules, all IT contractors who own their own company, or who work through a composite company will save either 22% or 40% tax on the money they pay into a pension fund.
A further benefit of this is that pensions contributions are an allowable expense for IR3., This helps you reduce any tax exposure you may have to this law.
The greatest benefits lie with those IT contractors who own their company outright.
The company can make the Pension contribution for the contractor. This is then allowed as a business expense in the accounts.
This ensures the 19% company tax is not applicable to the amount of the contribution. However, what is even better, is that no National Insurance is suffered as a result of drawing this money from the company.
Higher Rate Tax Payer
For a higher rate tax payer, the drawing of money from the business would have personally cost 41.5% in taxes.
If £10,000 was paid to a pension from your company, you would have saved paying £4,150 of tax to HMRC.
This is money which is then yours to draw once you have passed the age of 55. Some of it will be as a tax free lump sum and some for your retirement income.
For those IT contractors who work under a composite or paye route, the tax savings associated with pensions are still good. Although the higher your salary, the more National Insurance you will suffer.
Any paye tax you would have suffered on the salary is
repaid by the government to your pension pot.
If you had a salary of £10,000, which attracted 22% basic rate tax, you would get all this tax back into your pension fund.
If you are a higher rate tax payer, then you get the tax relief of 40%. That’s at the end of the year when you do your personal tax return.
The added benefit for those contractors concerned with IR35 is that if in the unlikely event HMRC succeed in classifying you caught by IR35, it is only the earnings you have after pensions contributions have been deducted that is assessable for this IR35 tax.
The advice came from David Greene of Contractor Umbrella Company Nasa Consulting.