Pensions for contractors with limited companies

Retirement may be something you are longing for or something that you dread. Whichever one you are, the earlier you start planning for it the better.

 

The age at which we can receive a state pension is rising (66 years from 2020, with further increases planned) and on average the majority of us are living longer. Therefore, it’s important that you start saving now so you can enjoy your future years in comfort.

Saving money into a pension can be easier if you are a contractor that operates via your own limited company, as you have access to some substantial tax advantages.

Contractor pensions

As a contractor working through a limited company, you can choose to pay into a pension scheme either one of two ways. Firstly, by making personal pension contributions, or, secondly, contributing into a pension scheme through your limited company (also known as employer contributions).

Both options come with their own tax advantages. Let’s look at them in detail.

Personal pension contributions

If you make personal pension contributions, you receive tax relief on these at the rate at which you pay income tax.

For example, as a basic rate tax-payer; you will only pay £80 for a £100 pension saving. This is not a bad saving.

However, there are limits on the amount you can pay into a pension whilst continuing to receive tax relief on these payments. The current limit is 100% of your income, up to an annual limit of £40,000 (for tax year 2018/19). The current lifetime allowance for pension contributions is £1 million.

If you have a large sum of money that you would like to invest into a pension you may be able to apply for the ‘carry forward rule’. This enables you to make use of unused allowances from the past three consecutive years as long as you were a member of a registered pension scheme.

Personal pension contributions as a director of a limited company

A note of caution if you plan on making personal pension contributions. As a contractor, you will probably have been told that the most tax efficient way to work is to take a small salary and the remainder through dividends. But as tax relief on personal contributions is calculated on your salary alone, your tax relief will be relatively low.  

You can overcome this, by either increasing your salary or by paying into a pension scheme straight from your limited company.

Contributions through a limited company

As a director of a limited company, you have the option of paying pre-taxed income straight into a pension scheme. The benefit of this is that pension contributions are classed as a ‘legitimate business expenses’ and thus it can be used to reduce your taxable profits. If you are unsure what a legitimate business is, you can find detailed clarification in our article ‘What you need to know about expenses’.

Additionally, employers (as a director of a limited company you are both an employer and employee of the company) don’t pay National Insurance Contributions on pension contributions. So, this equates to a further saving of 13.8% for the tax year 2018/19.

Before setting up or making changes to your pension scheme, you should seek professional advice. If you’re looking for advice on how to make contributions into a pension scheme through your limited company, give us a call on 01962 867550 or send us a message via our website.