Great Tax Savings on Pension Plans for the Self-Employed and Contractors
Pensions are one of a few remaining tax breaks available to contractors and freelancers, so if you can you should invest part of your income into a pension scheme and save not only the income tax but national insurance contributions too.
A key tax-planning opportunity
A pension plan is a key tax-planning opportunity where you get income tax relief on contributions to your pension, and pension contributions from company can reduce taxable profits. How tax relief on pension contributions is worked out depends on the scheme.
From April 2014, pension tax relief is restricted by an annual allowance of £40,000. There is no tax relief on pension contributions in excess of the annual allowance unless you have unused allowances (up to the maximum £40,000), which you are allowed to carry forward for up to three years.
All pension plans follow the basics rules that they are available to any UK resident who is under 75 years of age and can be bought widely via a number of licensed insurance providers, including banks, building societies, and some supermarkets.
What are the choices?
Personal pension plan: an investment policy for retirement, a personal pension plan is designed to offer a lump sum and regular income when you retire. The money you pay into the fund is invested on your behalf.
Stakeholder pension scheme: a money-purchase arrangement designed to provide a lump sum and income during retirement. Stakeholder pensions are popular with freelancers and contractors with irregular earnings.
Self-invested personal pension plan (SIPP): the same rules as the Stakeholder pension scheme applies regards contributions, tax relief and eligibility, but the bonus for many is investment freedom.
Which sort of pension?
What you decide to invest in is a matter of choice, guided often by personal circumstances. But paying into a pension plan is a great tax saving strategy, on which no freelancer or contractor should miss out.