Contractor pensions – don’t miss out!

Pensions are one of the few tax breaks that contractors can use to maximise their investments and reduce tax liabilities, whilst saving for retirement. With pensions having significantly more flexibility, putting money into a pension could be a great way to save for the future and take advantage of tax breaks offered by the government.

If you’re working outside of IR35 as a contractor, you will be unable to access the advantages of employee style workplace pensions. So, it’s important that you set up your own pension to enjoy the tax relief available on saving for the longer term.

Do you get a pension as a contractor?

Simple answer to this question is no, you won’t automatically get a pension if you’re a contractor working through your own limited or umbrella company. However, contractors can make pensions contributions from their limited company or from your own personal funds. However, it’s more tax efficient to make your pension contributions through your company.

What is a contractor pension?

A contractor pension is a flexible and tax efficient means of saving for your retirement and later life.

Why would a contractor contribute to a pension?

Pensions offer a great way for contractors to save for later life and retirement. But pensions also now offer contractors better flexibility and some great upfront tax benefits.

When should a contractor start paying into a pension?

The earlier you start to pay into a pension, the more money you’ll build for later life and the greater amount of tax relief you’ll get. It’s advisable for contractors to start investing in a pension at the start of their contracting career if they can afford to do so.

What are a contractors pension options?

There are a few options for contractors working through a one-person limited company. It could be a Self-invested pension plan (SIPP) or a simple stakeholder pension. You also have the option of joining the government’s NEST pension scheme if you’re a sole employee of your limited company.

SIPPs can give you a wider range of investments and flexibility but can come at a higher cost in terms of fees. It’s worth checking out the best option for you with your advisors. Seek advice on the best option for you.

How much can a limited company pay into my pension?

There isn’t a limit to how much your limited company can pay into your pension as a contractor. However, there are limits on which you can get tax relief.

What is the maximum pension contribution contractors can make?

To get maximum tax relief you can contribute up to £40,000 into a pension tax-free in any one tax year. You can invest more into your pension, but you won’t get the tax benefits. You also should not exceed your company income for the year (as HMRC may raise questions about whether it is from company activities).

What is the carry-forward rule?

If you want to put a larger lump sum into your pension, you may be able to use the carry-forward rule. Under this rule, you can use your annual allowances that you haven’t utilised in the previous three years.

What about auto-enrolment?

Contractors running their own limited company with themselves as the sole director, will not normally need to have an auto enrolment pension, unless you have other employees in the business. Auto enrolment pensions can be less flexible and more basic, so check out other options for pensions.

Do umbrella companies pay into pensions?

Contractors working through an umbrella company are classed as employees, which makes them automatically enrolled into a workplace pension scheme. The following conditions do apply:

• You’re between the age of 22 and State pension age
• You’re classed as an employee
• You’re classed as an ordinarily UK resident for work purposes
• You’re earning more than £10,000 a year

Tax saving on pensions

Simply put, when contractors earn tax relief on their pension, some of the money that they would have paid in tax on earnings goes into their pension pot rather than to the government.

Tax relief is paid on your pension contributions at the highest rate of income tax you pay.

• Basic-rate taxpayers get 20% pension tax relief
• Higher-rate taxpayers can claim 40% pension tax relief
• Additional-rate taxpayers can claim 45% pension tax relief

So, contractors who have not already set up a pension or dont currently make full use of the allowances available could be paying substantial amounts of tax unnecessarily. And this is true whether they are caught by IR35.

How do I set up a suitable contractor pension?

It’s possible to set up your own pension directly with providers. However, we recommend that you set up a suitable contractor pension via a specialist advisor.

It’s important with a contractor pension to have freedom to decrease, suspend, increase, restart and stop contributions as your income may be irregular and your employment status changes. You’ll need a contractor pension that’s flexible enough to allow contributions whether you continue to work through a one-man limited company/umbrella company, are between contracts or an employee.

Here at dns we have access to advisors that specialise in flexible pensions for contractors and will advise you on the right scheme for you.

Accessing my contractors pension.

Contractors can access their pension funds from the age of 55. You have the option to take out a lump sum (up to 25%) tax free. You’ll then have 6 months to start taking the remaining 75%, which you’ll usually pay tax on.

The options you have for taking the rest of your pension pot include:

• taking all or some of it as cash
• buying a product that gives give you a guaranteed income (sometimes known as an ‘annuity’) for life
• investing it to get a regular, adjustable income (sometimes known as ‘flexi-access drawdown’)

Contractors retirement planning

Don’t just limit your thinking to pensions as a contractor, you should also consider other tax-free investments such as ISAs and investing in things like property. Here at dns we offer contractors access to advice to create a tax-efficient retirement strategy that’s bespoke to you and your circumstances.

Contact us today for more information.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.