Contractors could be missing out on 69% tax relief

As safe as houses?

In a post-credit crunch world, it should be remembered that property is no longer such a safe investment because there is no guarantee that house prices will increase enough to provide a healthy income for retirement, writes Tony Harris of Contractor Money.

As the leading independent financial advisor to IT contractors, I feel this warning needs to be stated, as it has emerged that some contractors are overlooking, or perhaps not looking at all, at the potentially hefty tax savings associated with pension investment. Instead, their saving plans for retirement currently hinge on property, or Individual Savings Accounts, as CUK reported of an accountant’s survey last week.

Contractor pension? No thanks, says survey

The finding inspiring the article’s headline was that almost 70 per cent of contractor respondents are not currently contributing to a pension. That’s in spite of pensions offering a compelling tax saving for them that could, and still can, make a significant difference to their retirement income. The contractor respondents preferred to invest for retirement using an ISA or through bricks and mortar (-the most popular option) – but over half of them cited concern over such plans to fully fund their retirement.

Pensions – Contractor concerns & untruths

Being concerned about their future nest egg is fairly common for contractors. But they are known to worry about being prohibited from contributing to a pension on the basis they are not in permanent employment. This is a common misconception - far from the truth, as there are significant tax savings on offer to contractors who invest in a personal pension scheme or directly through their limited or umbrella company structure. 

Limited company pension – what’s it worth?

If you are contracting through your own limited company, then you can reduce your corporation tax bill by arranging for your company to fund a pension contribution on your behalf. You can invest up to £50,000 a year, so a large corporation tax bill could be reduced to nothing. Alternatively, as a limited company owner, you can fund a pension personally and benefit from income tax relief on your contributions.

Umbrella company pension – what’s it worth?

Contractors who operate through an umbrella company also have appealing options. They may be able to use a ‘salary sacrifice’ arrangement to contribute to a pension scheme that avoids income tax and both employers’ and employees’ National Insurance deductions due to the umbrella transferring funds directly to the pension on the worker’s behalf.

Tax relief at 69%

If you are a basic-rate tax payer, this allows you to save 39% on contributions, and if you’re higher rate, then you can benefit from tax relief at a cool 49%. It’s even better for those umbrella company workers who earn between £100,000 and £114,000, as then the tax savings can reach the equivalent of an enviable 69%. For these contractors, pensions are surely a must-have.

Past, present and future

Of course, it is true that some contractors may have been discouraged from personal provision in the past due to the complex means-testing approach of the current state pension system, which has seen some retirees being penalised for having built up a large personal pension pot. Freelance and contract workers will therefore welcome the government’s plan to introduce a flat rate pension scheme, which we hope will eliminate means-testing, system complexity and the resulting lower payouts to the self-employed.

Whatever your sector - or your plans for retirement, the tax savings on offer from pension investment are not to be sniffed at because they allow you to benefit today, while providing you with an income for tomorrow.

Editor’s note: Click here for more information on pensions & to contact Contractor Money