You might have seen or heard the recent advertisements about workplace pensions. So, how do they affect contractors?
As contractor accountants, most of our clients work through their own limited company as the sole director and employee of the limited company. The new workplace pensions legislation does not apply to sole directors, nor employees earning less than £8,105 per year. As our contractors are set up in a tax efficient way earning a low salary (below £8,105 per year) and taking the rest as dividends, the new workplace pensions legislation does not affect them.
However, should you as a contractor dismiss company pensions altogether? The answer is no. By setting up a company pension scheme for yourself as an employee, they present an opportunity for a tax saving.
If you contact a pension provider and set up a pension scheme for yourself, you can put the pension contribution costs through the limited company (simply include them as expenses in your bookkeeping), reducing the company's corporation tax bill.
Assuming your company pays corporation tax at 20%, this means that for every £1,000 paid in to your pension scheme a corporation tax saving of £200 is made.
So, if you can afford to pay £100 per month in to a pension scheme then over 5 years, you will have saved £1,200 in corporation tax and paid £6,000 into a pension fund for your retirement!
If you have any questions about this then just ask your contractor accountant who will be delighted to help you.
TAX SAVING = £200 for every £1,000 paid into a pension