Umbrella or limited, contractor pensions just got better

With all the adverse publicity it’s generated over the last few days - owing to its alleged ‘sweetheart’ tax deals with corporations, it must be nice for HM Revenue & Customs to end the year on applause for its actions in the pensions space, writes Tony Harris, founder of ContractorMoney, the independent financial advisory for contractors.

HMRC boosts personal pensions tax relief

But the taxman’s move – to extend the relief on cashing in small pensions value up to £2,000 to personal pension schemes – is even nicer for IT contractors, whether they work through an umbrella company or run their own limited company.

Contractors’ ‘patchwork’ retirement plans

What the change to personal pension tax relief means, in practice for contractors, is new flexibility. This is because, by virtue of how they work, contractors will often have a patchwork of retirement plans in place. These will have been built up over a long career which has typically been punctuated by various job changes, as they have sought to build up greater experience and a wider skill set. These numerous employers will have, in turn, led to a series of small personal pensions pots and occupational schemes.

Umbrella company contractors - get exploiting!

Similarly, most good umbrella companies now offer in-house pension schemes, which we fund for clients very tax efficiently via what’s known as ‘salary sacrifice.’ These schemes will be set up as individual personal pensions within a group arrangement.

Many members of such schemes will be very transient however, as preferred supplier lists dictate a change of umbrella when your contract changes. These new rules will therefore present an opportunity to exploit these smaller personal pension pots to good effect.

Limited company contractors can benefit too

In addition to umbrella contractors, limited company contractors who, for whatever reason, may chose to make only modest use of the substantial tax breaks afforded by pension investment, could again benefit if their personal pension pot is of a low value.

In summary this new £2,000 relief limit rule could have a positive, far-reaching effect on the contractor community and be taken advantage of by thousands of individual pension investors.

Editor’s Note: Further Reading –

What the Eurozone crisis means for contractor pensions
Contractors’ Questions: What are my pensions options?