Contractor Pensions – Practical Tips and Options for 2020

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Pension schemes are one of the few remaining tax reliefs the self-employed can enjoy and, coupled with the financial security they offer, it only makes sense to invest in one that’s right for you. As the adage goes, the sooner the better – and this couldn’t be more true or relevant than it is for your future financial planning.

Individual vs Company Pension Contributions

There are two main options when deciding how to put money away for your future when you are self-employed.

You can choose to make contributions as an individual, or through your company.

Choosing to add to your fund in a personal capacity gives you personal tax relief benefits; you can reclaim the basic rate of tax on the contributions that you make. If you prefer to contribute through your company, you will be eligible to claim corporation tax relief (within limitation) – but remember that payments must be deemed ‘wholly and exclusively for business use’ in order to be eligible.  

The way you choose to make payment toward your pension is a personal one, and we suggest taking professional advice in order to get the highest yield possible.

Maximum Pension Contributions 2019/20

A factor to consider is the maximum pension contributions you are eligible to make; through personal contributions, you can invest up to a maximum of 100% of your income, and through your company, up to the threshold £40,000 (2019/20).

Does the Auto Enrolment Scheme apply?

You may be concerned over the Auto Enrolment Pension Scheme, but you can rest assured that as the only director within your limited company, you are exempt from this inclusion – but you will need to inform The Pension Regulator of this.

Choosing the right pension provider that understands contracting will undoubtedly make this aspect easier. The right provider will assist you in increasing or decreasing your monthly payments to stay in line with fluctuating assignments and income.

There are relatively few differences between employee pensions and contractor pensions, least of all the importance of having one.

Top 3 Pension Contributions Tips

You can afford to make lower monthly contributions if you start paying into your pension from your first pay cheque. Three practical tips to help you save money to allocate to a monthly pension contributions are listed below.

  1. Calculate a budget based off your lowest-earning month and see what you can comfortably commit to. If a month goes well, you can increase your contribution, but you will never go below a certain payment amount.
  2. If you can maximise tax breaks, add those extra earnings to your pension pot (or savings account if you’re nearing the annual threshold).
  3. A quick tip regarding what % of your salary to contribute from Money Saving Expert: “Take the age you start your pension and halve it. Then put this % of your pre-tax salary into your pension each year until you retire.”

We’ve partnered with Contractor Wealth to introduce our loyal clients to one of the best specialist pension providers. You can reach them by getting in touch here. You can also chat to your account manager to find out how you could benefit from a pension scheme.

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