Should I go IT Umbrella to take advantage of new Pension contribution rules?

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This question was posed on our Ask an Accountant Forum by Ackers and we got two of our experts who are also sponsors to reply.

Question

Is it correct that as of April 2006 there will be unlimited pension contributions up to a lifetime maximum?

I am currently working via a Ltd Co but as ever debating if I should go umbrella. I worked via an umbrella when IR35 first came in and paid the maximum 20% of my earnings into a pension and avoided all NI and tax on that 20%.

If we can do this when the new tax rules come in it appears it will be very tax advantageous and I would go umbrella and pay in possibly 50% of what I earn ready for the my days on the beach!

It seems too good to be true and I’m thinking they will stop this via some rule or other or can they still deem you IR35 even in an umbrella setup

Reply from Rob Crossland of Umbrella Company Parasol

The new rules state that if you make an employee pension contribution over £3600 pa , the limit is based on a maximum 100% of salary.

So £40k salary = max £40k pension contribution (n.b. for less than £3600pa you don‘t even need a salary).

In theory an ’employer’ (the umbrella co) can contribute up to £215k pa, irrespective of salary. Personally I think that the revenue will probably hit us with an IR35 style fudge on this though in that the inspector of taxes will judge whether an outlandishly big employer contribution is ‘acceptable’ for the role of the employee and will do this on a case by case basis- i.e. if a company has £100k profit and pays that full £100k into a directors/employees pension scheme then the Revenue may cry foul.

Reply from David Colom

It is correct that with effect from 6 April 2006, the rules covering eight existing tax regimes for pension schemes are to be simplified with a single set of rules. The numerous controls in the current regimes will be replaced by two key controls which are:

1. Lifetime Allowance

A single lifetime allowance on the amount of pension savings that can benefit from tax relief will initially be set at £1.5m on 6 April, rising in increments each year up to £1.8m in 2010.

2. Annual Allowance

The annual allowance will be a maximum of £215k as from 6 April 2006 and will increase steadily each year. Contributions will no longer be limited to a fraction of capped earnings and individuals will be able to make unlimited contributions and tax relief will be given on any amount up to 100% of relevant earnings.

The above rule will apply equally to your own company or an umbrella company and does therefore not really affect your decision as to whether to “”go umbrella””, although you would need to choose an umbrella company which allows contributions to pension schemes (not all of them do). The correct reason for taking the umbrella company route is to save your time and avoid the responsibilities and administration of being a company director – umbrella companies do not change your IR35 status or that of your contract.

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