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With those in traditional employment being automatically enrolled into workplace pensions, many contractors, consultants, locums, freelancers and small business owners have concerns about how to prepare for their future. As specialists in representing independent professionals, there are a number of questions that we are asked regularly by our clients regarding their contractor pensions. Therefore we have put together some guidelines to help you understand your options when it comes to planning for your retirement.
As a limited company contractor, there are two ways that you can contribute to a pension, either personally (from your individual funds) or via your business.
These are contributions made to a pension scheme from personal funds and as such attract personal tax relief. The pension provider will top up the contribution by 20% to give you basic tax relief, for example if you contribute £80 you will receive an additional £20, so a total of £100 is added to your pension pot.
You should note that tax relief on personal pension contributions is capped at 100% of earned income and it is the topped up contribution that is taken into account. As a result, pension contributions in excess of salary are not normally efficient.
These are contributions made to a pension scheme from company funds and as such gain relief from corporation tax, assuming they are wholly and exclusively for the purpose of trade. Make sure that your pension provider is aware that the contributions are to be made from the company and they should be paid directly from the company account.
In April 2006 HM Revenue and Customs (HMRC) changed the way that it allowed corporation tax relief on company pension contributions and as such they are no longer automatically eligible for tax relief. Contributions are only eligible if they are wholly and exclusively for the purpose of trade rather than the benefit of the employee/director.
HMRC appear to accept that pension contributions are for the purpose of trade if the overall remuneration package of the employee/director is reasonable. This means that the salary and pension package as a whole should be considered and provided this does not cause the company to make a tax loss in any given year, the contributions should qualify for tax relief; this also assumes that the contributions are not excessive.
There are both annual and lifetime limits on the amount that can be contributed to a pension. The annual limit is £40,000 and the lifetime limit is £1,055,000. If these limits are breached there will be additional tax charges.
When deciding on which pension provider to use you may want to keep away from firms that ask for costs and fees upfront to ensure that all your contributions go towards your actual pension, this will be especially beneficial if you are only planning on contracting for a short period of time.
As a contractor you will ideally want to choose a provider that is familiar with how contractors work. These schemes are more likely to be flexible with how much you put into your pension so you can increase or decrease your monthly contributions depending on your contract at any given time.
Your provider should also be a firm which is well trusted and financially secure so you have confidence in their ability to look after your investment. Many companies will come and go in the pensions market and so it is important that you choose a provider who can provide a long-term commitment to you.
If you would like to find out more about contractor pensions and planning for your retirement then please get in touch with a member of our new business team on 01253 362062.