Most Contractors make use of the ability to pay "Employer" contributions from their Limited Company into a Pension plan. This carries many tax benefits without impacting any benefit in kind, P11D.
These premiums are treated as a business expense and therefore are offset against Corporation Tax, thus allowing a 19% tax saving that further boosts your retirement pot. The pot grows tax free and is also outside your estate for Inheritance Tax purposes.
As Contractors typically draw a small salary and handsome dividends, this impacts on any personal contributions.
Firstly, there would be 20% income tax relief on the contribution at source, with no higher rate relief.
Secondly, dividends are not considerable for pension contributions when calculating contribution limits. We need to be mindful here too of "net relevant earnings", which prohibits an individual from contributing more than their small declared salary in the given tax year.
In addition, utilising the Employer contribution option is not classed as a personal drawing and therefore does not erode any of your income tax allowances or change your dividend rate tax.
It is for these reasons; Haven predominantly base their advice around Company subscriptions where Contractors are concerned.
If you fall outside of IR35 post April 2021, the ability to make Pension contributions offers a tax efficient method of drawing Company funds for your own use in retirement.
Post April 2021, we anticipate many PSC Contractors moving under an Umbrella style arrangement, thus becoming, in effect, PAYE.
Whilst individuals will lose the dividend benefit and probably pay more tax, we see a significant "Tax Relief" opportunity here. Looking at day rates charged, we anticipate most Contractors falling into the 40% income tax bracket, however, more positively, this will then be the amount of tax relief available on Pension contributions.
The advantage to you, going forward, is the ability to make Pension contributions and gain 40% tax relief, as opposed to 19% under a Limited Company arrangement.
It is possible the benefit could be further heightened should your Payroll company offer to deduct this from your pay at source, meaning you gain the 40% tax relief immediately through your payslip.
This prevents the usual rigmarole of making contributions net of 20% basic rate tax, only to then have to claim the difference between basic and higher rate relief through the submission of a self-assessment return.
There are many Pension providers which will facilitate this, but again there are many who won’t, so do check with us to confirm which will allow this form of payment.
As the premiums cannot be taken via a standard direct debit due to the variation in amounts, this will often require a manual input to the provider systems by the FCA regulated Pension Advisory firm.
As a Contractor through an Umbrella arrangement, your remuneration package is such that all deductions are taken at source and you are left with the net amount to take home.
Pension contributions are included within these deductions, and whilst you receive the full entitlement (5% employer and 3% employee) as is required by TPR, the 8% in its entirety is apportioned from your package at source, meaning the cost of Auto-Enrolment is met by the member.
Whilst Auto-Enrolment is an option for contactors operating under an Umbrella arrangement, we would challenge whether it is indeed the most suitable choice given the alternative options available.
Could you be better having these contributions directed to your own Pension plan?
There are many things to consider here and Haven would be more than happy to assist you in arriving at the most suitable decision for your own contributions and where they are best directed.
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