A practical guide to pension planning for contractors
Understand your options, the tax advantages, and how to structure contributions via your limited company or umbrella.
A contractor pension is an investment designed to provide income later in life. Following reforms over the last decade, pensions now serve as a significant, tax-advantaged savings vehicle — offering a secure income or the flexibility to draw what you need, when you need it.
HMRC provides tax reliefs to encourage people to fund their own retirement rather than relying solely on the State.
Most limited company contractors contribute via their company (often the most tax-efficient). Umbrella contractors typically use salary sacrifice.
It's never too early — or too late — to begin. See how delaying can cost you, here.
Flexible, contractor-friendly advice for limited company and umbrella workers.
Now rare outside the public sector due to cost. Income is based on your service length, salary on leaving, and the scheme's accrual rate. Employers typically contribute the most and guarantee the income level.
Much more common. Your income depends on contributions and investment performance. Since 2015's Pension Freedoms, there are several drawdown options. Regular reviews are important as employers have no liability beyond contributions.
Since February 2018, all employers must provide a pension scheme and auto-enrol eligible staff every three years as part of the government's push to improve retirement provision.
Many contractors opt for a more flexible, non-AE arrangement due to irregular income.
Efficient remuneration usually blends PAYE salary, dividends, and pension contributions. HMRC incentivises pensions with reliefs; the mechanism depends on where the payment originates.
Dividend allowance: for 2024/25 the tax-free dividend allowance is £500, making pension contributions relatively more attractive.
There's no universal number. It depends on lifestyle goals, target retirement age, and affordability. A specialist adviser models scenarios and sets flexible contributions that can pause or scale with your contracts.
Institutional risk is mitigated by regulation and the Financial Services Compensation Scheme (FSCS); some contracts have high protection levels (limits/rules apply).
Since 2015's Pension Freedoms, you can choose how and when to draw income (e.g., drawdown, lump sums, annuities). Many contractors "glide" into retirement — part-time or consultancy — so flexible income planning is key.
Beneficiaries can often keep funds inside a pension wrapper for tax-efficiency. If death occurs before age 75, lump sums can be tax-free (subject to rules). Pensions are usually outside your estate for IHT purposes.
You can DIY, but choice overload (provider, funds, fees, ownership) is real. A regulated adviser tailors strategy, sets contribution levels, and monitors annually. Studies indicate advised consumers can be substantially better off over time.
Yolo Wealth specialises in contractor finances and offers an initial consultation at their expense.
Approver: Quilter Wealth Limited & Quilter Mortgage Planning Limited. 24th June 2024
Tax treatment varies according to individual circumstances and is subject to change.
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
Complete the form below and our ContractorUK pension partner will be in touch.
Prefer email? Use the enquiry form and outline your situation.
