Why investing in a pension could be an option for you
Pensions can be one of the most tax efficient ways to save due to the tax relief offered by the government. As a contractor however, you can also invest in a personal pension via your limited company, which can be even more tax efficient. Pension contributions made in this way come directly from your company's income and are invested before corporation tax deductions, reducing the overall taxation of your business profits.
The example below is based on a limited company contractor working outside IR35, in the higher tax bracket and used the 0% rate of dividend tax. It doesn’t take into account all of the factors that will affect the amount of tax you could save:
For every £100 that your company earns, you must pay 19% corporation tax, which brings the amount down to £81.
To take this money out of the company, most contractors take their income through a mixture of salary and dividends.
If you were to take this £81 as a dividend, you will incur dividend tax of 32.5% (full year 2017/18), which brings the amount down to just over £54.
If you were to invest the £100 in a pension, you can contribute the whole amount and once in the pension, this amount could grow.
And bear in mind, at retirement, 25% of the pension value will usually be tax free and the remainder taxable at your marginal rate.
As you can see, a £100 pension contribution via your limited company could be an effective way to both potentially minimise the tax paid on your business profits and save for your retirement and remember, you can currently access this money from age 55.
Please remember that the value of an investment can go down as well as up. You could get back less than you have paid in. This is based on our current understanding of current tax legislation and HM Revenue & Customs practice, both of which may change without notice. The impact of taxation (and any tax relief) depends on individual circumstances.
So while an accountant is often seen as a necessity for many Contractors, when it comes to retirement planning and investment decisions, the benefits of financial advice can be compelling. Prudential can help you when it comes to actively managing your money and maximising one of the few benefits remaining for contractors - pensions.
Whether you are new to contracting or an experienced professional, our Prudential Financial Planning advisers - The Man From The Pru - can arrange a no obligation appointment at a time and place to suit you.
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