Whilst in your previous job, you may have already made arrangements for a private pension or alternatively you may have kept on putting if off and meaning to do it at some point.
Now that IR35 is in place, pensions are one of the few effective tax breaks open to contractors. They allow you to invest money directly from your company bank account into your pension.
This allows you to avoid paying the income tax and the national insurance you would have paid if you had to contribute from your personal salary. In addition you can reduce your employers NI contributions.
Any growth on your pension funds are tax free and the amount of tax relief especially for high earners can be as much as 48%. This means for every £100 that is invested in your pension, you pay £52 and the tax man contributes £48.
There are two types of pension schemes available and we can advise you on the most suitable.
Personal / Stakeholder Pensions
These are open to anyone including children and non-working spouses, apart from contractors who run their own limited company and already pay into a executive pension plan.
The maximum that an individual can contribute and still receive
tax relief is the greater of their salary or £3,600 per annum
to a maximum called the annual allowance of £225,000 in the
tax year 2007/8. A company can pay up to the annual allowance for
an individual within a year.
You can contribute into these funds from your limited company. As a contractor, you can nominate a base year from the past five years and then invest based on the salary that you took that year. You could even take the potentially higher salary from your permanent employment days and then invest at that level.
Executive Pensions
These are useful for contractors and entrepreneurs who may have neglected pension planning when building up their business. For any given salary and age, the Inland Revenue will set an allowance that takes into account your marital status, pension history and the age of your business.
Previously executive pensions were expensive to administer, but we now have access to low cost schemes.
At Forum Wealth Management, we can advise on the most suitable pension plan for you over the long term. Whilst some pension plans may seem very tempting with low charges, we look at the lifetime of the pension plan to judge its value and whether it is right for you.
When choosing a suitable pension for you we will look at:
- The track record of the provider over all their funds
- Current and potential government legislation
- How much flexibility you will need in making payments
- Charges involved in running the scheme
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