Why save for a pension?
A pension enables you to save enough so that when you retire you can enjoy a comfortable lifestyle by drawing down from your accumulated pension fund. While this means your money is not easily accessible for several years, it does come with significant tax advantages. Pension funds are not subject to tax and so income and capital grows tax-free within a scheme.
Paying into your own private pension (called a Stakeholder pension) has two significant benefits for contractors;
1. It’s a very tax efficient way of extracting funds from your business. You do not get taxed personally on any pension contributions, and they are fully tax deductible for your business.
2. A buffer from IR35. If you were ever determined by the HMRC to be caught by IR35, any tax and NIC due on your company income would be calculated AFTER allowing for all your pension contributions. So whatever happens regarding your IR35 status, you will never pay any tax or NIC on payments you put into your stakeholder pension.
Example 1: For a basic rate taxpayer, every £100 in dividends you receive will have had 19% corporation tax paid on them. So to take a £100 dividend, your company needs to have made a profit of £123.46. You could instead pay £123 into your stakeholder pension because pension contributions are not taxed.
Example 2: For a higher rate taxpayer, every £100 in dividends you receive will have had 19% corporation tax paid on them, AND you will need to pay personal tax on the dividend. So to take a £100 dividend, your company needs to have made a profit of £123.46, and you will have to pay personal tax of £32.50 leaving you with £67.50. You could instead pay £123 into your stakeholder pension because pension contributions are not taxed, neither through the business, nor on your personal income.
Pension rules for 2019/20
The good news is your private (stakeholder) pension is safe because pension funds cannot become insolvent. A private pension fund is carefully protected by law. Just ensure you keep to the rules;
1. The pensions savings Annual Allowance is £40,000 (Gross)
2. Any unused Annual Allowance may be carried forward three years
3. An Annual Allowance tax charge will apply if allowances are exceeded
4. The lifetime allowance is £1,050,000
Pension companies are required to send an “annual allowance pension savings statement” if you paid more than the annual allowance into a pension plan with them. Note, if you are paying into more than one pension scheme, you will need to calculate this yourself. If you have contributed more than the annual allowance (Plus any unused allowance carried forward) you might be liable to a tax charge, which you must report to HMRC on your self-assessment tax return.
How to arrange a pension
If setting up a pension is something that appeals to you, email or call your account manager and they will be able to refer you to the pension specialist that we use. Once the pension is set-up it’s just a matter of starting a standing order payment from your business bank account, into your pension fund. And if you intend to leave the UK permanently at some point in the future, in most instances you can transfer your pension into an overseas pension fund.
Although you can make contributions into your pension up to your annual allowance each year it is important that the amounts contributed must not be larger than your corporate income for the year of the contribution, otherwise there might be questions from HMRC about whether the money was actually sourced from your trading activities.