Guide to Pensions
Read about our guide in case you are planning for retirement will help you understand your options.
With the automatic enrolment into workplace pensions in a traditional employment set-up, many consultants, contractors, locums, small business owners and freelancers have concerns about preparation for their future. As specialists in representing independent professionals, there are various questions that we ask our clients relating to their contractor pensions. Therefore we have brought forward some guidelines for you to understand your options when it is related to planning for your retirement.
There are two ways as a limited company contractor for contributing to a pension, either personally (from your individual funds) or via your business.
Personal Pension Contributions
Personal Pension contributions are made to a pension scheme from personal funds in order to attract personal tax relief. The contribution will be high for pension provider which goes up to 20% for providing you basic tax relief, for example, you will obtain an additional £20 for contributing £80, a total of £100 gets added to your pension.
You should take into consideration that the tax relief on personal pension contributions is capped at 100% of earned income and it is one of the best contributions. As a result, pension contributions ahead of salary amount are not usually effective.
Company Pension Contributions
Company Pension Contributions are made to a pension scheme from company funds and obtain relief from corporation tax, presuming they are completely and entirely meant for the trade purposes. Ensure that your pension provider knows that the contributions are to be made from the company and they should be paid directly from the company account.
In April 2006 HMRC changed the rules that it allowed corporation tax relief on company pension contributions and as such, they are no longer applicable for tax relief. Contributions are only entitled if they are completely and entirely meant for the trade purposes instead of the benefit of the employee/director.
HMRC too admit that pension contributions are meant for the trade purposes if the entire remuneration package of the employee/director is reasonable. This means that the pension and salary package as a whole should be treated and provided this does not make the company incur a tax loss in any given year, the contributions should be entitled to tax relief, this also presumes that the contributions are not exorbitant.
There are both lifetime and annual limits on the amount which can be contributed to a pension. The annual limit for 2014/15 is £40,000 and the lifetime limit is £1,250,000. On breaching any of these limits would be subject to additional tax changes.
Choosing a Pension Provider
You may wish to stay away from the firms asking you for costs and fees upfront when you are on a lookout for an appropriate pension provider. You want to use that pension provider where your all contributions go towards your actual pension. This will be especially beneficial if you are only planning to go for contracting for a short period of time.
As a contractor, you will preferably wish to select a provider that knows about how contractors work. These schemes are more suitable to be flexible with how much you put into your pension so you can increase or decrease your monthly contributions subject to your contract at any given time.
Your provider should also be a well trusted and a financially secured firm so you should have full confidence in their capabilities for looking after your investment. Many pension provider companies come and go in the market and so it is relevant for you to select a provider who can give a long-term commitment to you.
If you are planning for retirement and want to know more about contract pensions, get in touch with our team at 020 3004 9303.