The benefits of an interim career are obvious and plentiful but it’s also important to consider the more practical side of business including saving and investing for your future, a pension is usually a great way to build up a pot that can provide an income for when you retire, as a permanent employee your employer is likely to provide a scheme for this, but now you are self-employed or working through your own limited company it’s up to you to start making contributions.
Richard Hepburn, Operations Manager at Gorilla Accounting shares his advice:
There are two main ways of making pension contributions, either privately or through your limited company.
Company Pension Contributions
- The pension should be in the company name and paid directly from the company bank account.
- The contributions are not grossed up by the provider and are normally eligible for Corporation Tax relief.
- As with any business expenses, HMRC advise that they should be “wholly and exclusively” for business.
Personal Pension Contributions
- Made from personal funds, the pension provider claims tax relief and adds 20% to the contribution. For example, a personal pension contribution of £800 would be grossed up to £1000.
- The gross personal contributions extend the tax basic rate bands, meaning that our clients could declare more dividends at 7.5%, rather than at 32.5%.
- The contributions can also reduce your net income when calculating income for the Child Benefit charge and if a client has exceeded a total income of £100,000 and started to lose their personal allowance.
- You can only make personal contributions up to the level of your salary. A client taking a salary of £8164 can, therefore, contribute £6531, which will be grossed up to £8164.
- If you don’t have a salary, you can still make contributions of £2880, which are grossed up to £3600.
- The annual allowance for 2018/19 is £40,000 and this is the total that is contributed towards your pension for the year. This covers all pension schemes, it is not an allowance per scheme.
- There is now a tapered annual allowance for high earners. For every £2 of income above £150,000, £1 of the annual allowance is lost, but it is capped at £10,000. The maximum reduction is therefore £30,000, meaning anyone earning over £210,000 will have their annual allowance capped at £10,000.
- For anyone that exceeds the annual allowance, the excess is treated as income and taxed in the relevant band.
- The lifetime allowance is currently £1.03m. Further tax may be due if your pension pot exceeds the lifetime allowance.
- If the allowance is exceeded, there are significant tax charges on the excess. The charge can be as high as 55% depending on how the pension is paid.
It’s clear there are a number of considerations to consider if you are looking to invest in your future, Gorilla Accounting is a specialist accountancy firm for self-employed professionals. For an informal chat get in touch today 0330 024 0406 or email firstname.lastname@example.org. Alternatively, you can visit the website here.