Pensions for Limited Company Contractors

What are Limited Company contractor pensions?

Contractor pensions represents one of the few ways a contractor/freelancer can extract funds out of their company in a tax-efficient way.

However, tax efficiency is not the only consideration here. Pension planning is a genuine point for contractors/freelancers given it is unlikely they will be receiving any kind of occupational pension contributions and saving for retirement should always be part of a contractor/freelancers longer term strategy.

How do pensions work for contractors & freelancers?

For contractors & freelancers, in particular those operating through their own Limited Companies, you can contribute into approved HMRC pension plans and receive generous tax breaks.

Contributions can be made either by personal pension contributions from a NET salary (HMRC will then top up the contributions with the marginal rate of tax of the individual). However, personal pension contributions are limited to 100% of net relevant earnings (in other words the amount of your salary) and in contractor/freelancer Ltd Co set ups, this could be quite limiting as often a director salary is set at the personal allowance level.

Or, contributions can be made by company pension contributions directly through your Contractor Limited Company. It is this type of contribution we will focus upon as there are no NRE (net relevant earnings) restrictions on contributions made.

Pension benefits are then available at retirement age, normally from age 50 onwards.

What tax breaks are available?

Contributions made directly via the Limited Company on behalf of the director/employee will attract corporation tax relief at source. In other words, if you were to make a £1,000 contribution into a registered pension scheme via your Contractor Ltd Co, then the pension scheme will in effect receive £1,000. No tax is deducted at all!

However, the pension contributions must be “wholly and exclusively” for the purpose of trade and all contributions should be paid directly from the company business bank account.

As of 2017-18, the annual limit for contributions is £40,000 and the lifetime limit is £1,000,000. As long as you do not exceed these amounts and any contributions are not deemed excessive, you should in most cases receive full tax relief on pension contributions made through your Contractor Ltd Co.

What types of pension plans are there?

Essentially, there are two types of pension plans for contractors/freelancers:

  • Personal/Stakeholder Pensions
  • Executive Pensions

When choosing a pension plan provider, always go with a reputable and long established provider. An Independent Financial Advisor is a good place to start, although some of the larger more established pension providers should be considered.

Want to find out more ...

Fill in the form below to book an appointment with a qualified contractor pensions adviser.

If you prefer not to submit details over the internet then please call us on 0203 368 3173 and quote on the phone “new pensions enquiry”. We can then discuss your questions over the phone.

Aidhan Accountancy

Sutherland House, 3 Lloyds Avenue, London, EC3N 3DS