Contractors should act now to secure 50% pension tax relief
Contractors saving towards retirement were this week given two reasons to mark 05.04.2013 in their diaries, but a third asterisk next to the date is necessary for top-earning freelancers because - also on April 5th - higher rate tax relief will fall from 50% to 45%.
Here, exclusively for ContractorUK, Tony Harris of IFA ContractorMoney, recommends that affected contractors, including those with membership to the ContractorUK Money Club, make the most of any 50% tax relief before it’s too late.
Act now to maximise your tax relief
A personal, as opposed to company-funded, pension contribution receives tax relief at your highest marginal rate, which allows contractors to dramatically cut their tax bills today while saving for tomorrow. Highest rate taxpayers currently save 50% on personal contributions which means for every £100 you invest, the taxman pays £50.
But as of April 5th, the highest tax rate will drop to 45% so contractors in this income bracket need to act now to maximise the benefit of tax relief on their pension contributions.
Limited company contractors
Contractors working via a limited company will often favour company contributions but can still also invest 100% of salary from their personal funds too. Whilst those outside of IR35 will typically pay a tax-efficiently low salary and take the rest of their income as dividends, maximising personal contributions based on this modest salary can still be a useful way to claw-back income tax. For those working on a self-employed basis - or via a limited company - but caught by IR35 however, pension contributions become an essential method of softening the blow of the tax due.
Assuming you do have the scope to invest personally, contributing the maximum allowance of £50,000 for this year before the April 5th deadline will give you an extra £2,500 tax relief than if you were to contribute the same amount in the 2013/14 tax year.
Umbrella company contractors
If as a contractor you are operating via an umbrella then you could potentially take advantage of an in-house group pension scheme to invest via ‘salary sacrifice’. Contributing through salary sacrifice allows contractors to save income tax at their highest marginal rate but should also allow the employers’ and employees’ national insurance to be avoided too. This combined tax and NI saving could mean that the Chancellor is funding as much as 60% of any investment made, so if you don’t currently make use of your umbrella’s pension scheme then now could be the time to enquire.
Additional tax savings…
You could also potentially benefit from the 50% rate of relief on payments such as charitable donations made before April 5th , which offers another option to highest rate taxpayers looking to minimise their outlay to the taxman.