There are two main ways in which you can contribute to a pension fund, either personally or via your business and each method could be advantageous from a tax perspective depending on your circumstances.
Personal Pension Contributions
These are contributions made to a pension scheme from personal funds and as such attract personal tax relief. The pension provider will 'gross' up the contribution by 20% to give you basic rate relief i.e. an £80 contribution will add £100 to the pension pot. Your basic rate band will also be extended by the grossed up pension contribution (£100 in this example) so if you are a high rate tax payer tax relief is given in full i.e. up to the top rate of tax you pay.
You should however note that personal pension contributions are capped at 100% of earned income (broadly speaking, salary) for tax relief and it is the grossed up contribution that is taken into account. As a result, contributions in excess of salary are not normally efficient.
Company Pension Contributions
These are contributions made to a pension scheme from company funds and as such gain relief from corporation tax, assuming they are 'wholly and exclusively' for the purpose of trade. You need to ensure that the pension provider is aware that the contributions are from the company and they should be paid direct from the company account.
In April 2006 HMRC changed the way it allowed corporation tax relief on company pension contributions and as such they are no longer automatically eligible. However, they are eligible for relief if the contribution is 'wholly and exclusively' for the purpose of trade rather than for the benefit of the employee/director.
Although the guidance is not set in stone on this, it would appear that HMRC will accept the contributions are for the purpose of trade, if the overall remuneration package of the employee/director is reasonable. This means that the salary and pension package as a whole should be considered and provided this does not cause the company to make a tax loss in any given year, the contributions should qualify for tax relief; this also assumes that contributions are not excessive.
There are both annual and lifetime limits on the amount of pension input that can be made, the annual limit for 2014/15 is £40,000 and the lifetime limit is £1,250,000. If these limits are breached there will be additional tax charges.
As part of your overall wealth planning, you may also wish to consider investments in areas such as Individual Savings Accounts (ISA's), investment trusts and unit trusts etc.
Others areas to consider are Income Replacement and Critical Illness Insurance.
Nixon Williams does not provide financial advice on the above areas but we can introduce you to an advisor with knowledge of the contractor and freelance world. Nixon Williams only introduce financial advisors who are authorised and regulated by the Financial Services Authority.
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