Are you a contractor looking to minimise your tax bill?

As a contractor, we know how important it is to manage your finances and hold on to as much of your hard earned money as possible.

Taking advantage of a pension could be a great way for you to potentially minimise the amound of tax you pay.

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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Arrange an appointment

If you don't already have a financial adviser, we can help you. Simply fill in the form and one of our advisers will call to arrange a meeting. Or call us on 0800 151 3919 and quote ezyco-contractor (Mon-Fri 9am-5pm).

Prudential Financial Planning advisers are qualified and experienced in financial planning and can advise on Prudential's pension products. They can also advise on other areas of financial planning from a range of carefully selected products of other providers. This is known as a restricted advice service.

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It may be necessary, for the above purposes, to transfer your information to countries that provide a different level of data protection from the UK. Where this is the case we will ensure your data is kept secure. 

‘Prudential’ is a trading name of Prudential Financial Planning Limited. Prudential Financial Planning Limited is registered in England and Wales. Registered office at Laurence Pountney Hill, London EC4R 0HH. Registered number 5739054. Authorised and regulated by the Financial Conduct Authority.

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