We all need to look to the future and ask what lifestyle we wish to enjoy when we retire. A company or personally funded pension is a great way to save for tomorrow while cutting your tax bill today. Review existing pension arrangements to make sure that they are appropriate to your Contractor status or set up a new scheme from scratch with flexibility and a wide investment range tailored to Contractors.

If you are aged under 75 and resident in the UK, you should be eligible to contribute tax efficiently to a pension. Most UK residents will also qualify for a state pension but this will only pay you £110.15 per week so Contractors will usually supplement this state provision with a personal or company funded pension to improve their future retirement income and save tax today.

You can personally contribute up to 100% of the value of your salary.
Company funded pension contributions have no relation to salary however so whilst Business Owners may choose to draw a tax efficiently low salary (to help reduce National Insurance) which will limit the scope for personal investment, this need not limit your ability to reduce company and personal tax bills.

In good trading years a hefty corporation tax bill may potentially be reduced to nothing with a company pension contribution and your pension can also become a central plank of your business by exploiting the freedom to own commercial property if required. You can hold business premises via a Self Invested Personal Pension (SIPP) or Small Self Administered scheme (SSAS) with the pension in turn charging your company rent, helping to inflate the size of the pension pot even further.

There is an annual limit which is regularly reviewed and for the tax year 2013/14 the maximum amount is £50,000 but this will fall to £40,000 in the next tax year. The lifetime allowance is currently £1.5 million but again will fall to £1.25 million. Contributions above the annual and lifetime limit are allowed but will be taxed.

As an incentive to save, the Government offers tax relief on contributions to a pension fund at your highest marginal rate, so for higher rate tax payers a £20,000 personal investment could cost just £12,000. Basic rate tax relief at 20% is applied directly by the Government to all contributions but higher rate tax payers can claim further tax relief via your tax return each year.

If you make a company contribution to a pension then you benefit from corporation tax relief at 20% so the benefits are the same for basic rate taxpayers. For higher rate taxpayers a personal investment even secures a marginally higher level of relief. However company owners still invariably make company contributions because you save the personal tax that you may have paid in the first place. As pension contributions are also outside of IR35, any subsequent investigation that finds you within this tax regime, will not levy employees and employers NI on this proportion of your income that, in the eyes of the taxman, has legitimately been invested on behalf of you as a Director.

The great news is that Contractors can take a tax free lump sum of 25% of the value of your pension as early as age 55, known as the Pension Commencement Lump Sum (PCLS). You won’t need to stop contributing to your pension after taking the PCLS and you are under no obligation to retire so Contractors nearing their 55th Birthday could potentially invest today, benefit from the tax relief and immediately withdraw 25% tax free. This represents a very tax efficient method of transferring contract income in to personal hands.

To speak to a specialist Adviser about pensions and how you could save tax on your contract income, call 0845 062 8888.

Financial advice is given by ContractorFinancials, which is a trading name of ContractorFinancials Ltd and is regulated and authorised by the Financial Services Authority.