The Limited Company contractor’s guide to pensions

Pensions

As a Limited Company contractor you may pay into a pension in order to lower your overall tax liability, but are you aware of how the payment is made, who the contract is between and the implications this can have on how the tax relief is obtained? Is your pension being treated correctly?

 

Employer’s Pension Contribution

You should inform your pension provider in writing, that your pension contribution is in fact an Employer contribution and that it is being made gross. As the contract is between the Employer and your chosen pension company, payments should therefore be made direct from the Employer’s bank account (your Limited Company’s business bank account).

 

For example, a contribution of £800 will increase your pension pot by £800.

 

Employer’s contributions are deductible expenses for Corporation Tax purposes, meaning the company’s profits are reduced by the value of the contributions and the company pays less tax as a result.

 

Remember! Employer contributions are a deductible expense for IR35 deemed salary calculations, which can reduce the tax due by a large amount (which is great news!).

 

Your Personal Pension Contribution

If you personally pay into a pension, then none of it will go near your Limited Company. You’ll personally pay your pension provider a net amount and your provider will then claim 20% for tax from HMRC.

 

For example, a contribution of £800 will increase your pension pot by £1,000.

 

Personal contributions also increase your basic rate taxband, meaning you can earn more money before you cross over into higher tax rates. If you make a pension contribution of £800, your basic rate taxband will increase from £32,000 to £33,000, so you will pay a lower rate of tax on that portion of income.

 

However, if you’re not a higher rate taxpayer then this relief will be wasted. It could be more beneficial to make Employer contributions direct from your company, or increase your personal income to take full advantage of the relief. Speak to your Personal Accountant to understand which route is the most beneficial one to take for you and your circumstances. It’s a delicate balancing act when taking an additional dividend to pay into your pension, so make sure your contractor accountant completes the calculations on your behalf.

 

Are you paying net or gross, as an employer or an employee?

Your pension provider will be able to give you this information. If your payments are treated as net but are paid through your Limited Company, then you’re getting tax relief twice which will arouse suspicion from HMRC and could result in an unexpected tax bill.

 

Remember! The overall limit for your pension contributions is £40,000 (for tax years 2015-16 and 2016-17), which includes both payments made by you personally and by your employer.

 

Got questions about your pension? Speak to your dedicated Personal Accountant for tailored advice that’s unique to your needs as a Limited Company contractor.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

“No giveaways, no gimmicks, a Budget for the long-term” – but will the 2015 Red Box budget for contractors and freelancers?

Will the Red Box budget for contractors and freelancers?

The Budget is this Wednesday and in true pre-Election fashion it is unlikely it will be full of radical announcements.

I predict it will consist of Osborne telling us what he thinks we need to hear and not what he really intends to do, if he still has his job in the second week of May.  Could we be looking at two Budgets in one year?

The Conservatives billed themselves as being ‘the party of small business’ but, in reality, very few independent professionals will have felt any benefits from policy changes. In fact, the Government could be criticised for not delivering enough to empower freelancers and contractors. In the final pre-Election Budget it is uncertain, but also unlikely, that contractors will see significant changes in Osborne’s statement.

A number of tax changes have been announced already and have been under discussion. To the extent that they are not contentious, or at least acceptable to the other major political parties, they will be included in the Finance Bill and will be enacted before the end of this month.

The main, eye catching, announcements are likely to be changes which the Chancellor would like to make in the next Parliament if the Conservatives are in power, or are a member of a Coalition, in that Parliament; as there will then be less than six weeks of campaigning before the Election on Thursday 7 May.

The tone, and content, of the Budget is going to be highly political and will have a strong influence on the campaign not least because the Chancellor is the key strategist of the Conservative party. We know that contractors and freelancers are the lifeblood of the UK economy and they have an important role in rebuilding the economy. Inevitably there won’t be many people whom the Budget doesn’t affect one way or another so we’ve picked out some of our predictions that will be of particular interest to freelancers and contractors.

What is likely to come up in the Budget 2015 specifically affecting contractors and freelancers?

More measures to tackle tax evasion and tax avoidance

We can definitely expect that more tough measures will be announced, for next Parliament, to provide criminal sanctions for tax evaders and their advisors, whatever their role. Initiatives such as a ‘diverted profits tax’ targeting multinational companies who have been judged to have shifted profits overseas to avoid tax are expected to be implemented.

Support for key industries

It is expected that Osborne will unveil measures to support the North Sea oil and gas industry which will be welcome to many contractors who work in this industry, from engineers to IT specialists and finance professionals. It is hoped that a boost to British manufacturing will help rebalance the economy and protect the livelihood of contractors already in the industry while creating demand for their skills.

Tax simplification

The Office of Tax Simplification (OTS) has suggested many changes in a variety of areas that have previously been adopted but it has suffered from a lack of resources and is due to wind up at the end of this Parliament. The Chancellor may decide to put the OTS on a more permanent footing and properly resourced if the Conservatives win the election. If so we can expect more changes to arise in the coming Parliament to simplify taxation especially for small businesses and individuals.

Travel and subsistence claims for Umbrella workers

This is still high on the political agenda but the highly anticipated clampdown on travel and subsistence (T&S) expenses may not happen in this Budget. The concern was originally raised by MPs accusing Umbrellas of exploiting workers but FCSA disagree and have plead to MPs that imposing these proposals would threaten the £2.8bn of income tax and National Insurance Contributions generated by Umbrella service providers  HMRC have already stated that “any proposed measure to address this misuse will not come into effect until 2016 at the earliest”.

We can expect a restriction rather than a removal of tax relief for workers, with a curtailment of T&S expenses more likely from April 2016. The Chancellor’s statement last Wednesday, following the closure of HMRC’s consultation, will “inform the government’s decisions at Budget ‘15 on how best to address this avoidance.”

Personal Allowances and income tax thresholds

The Allowance for the average person went up from £6,475 to £10,000 over this Parliament, and the Autumn Statement announced an increase to £10,600 from 6 April 2015. A further increase is possible, perhaps by an additional £200, but unlikely, although there are hints that the Chancellor may announce future target increases.

It’s possible that the Chancellor may extend the basic rate threshold so that, allowing for allowances that the basic rate band moves closer towards an intended goal, announced in the Autumn Statement, of £50,000.

Inheritance Tax

Inheritance Tax is currently levied at 40% on estates worth £325,000 and above. There are hints of a return to the promise of increasing the Inheritance Tax nil rate band to £1 million and clarifying if the limit is per person or per married couple or civil partnership. It is thought Osborne will announce plans which involves the person inheriting rather than the deceased’s estate, being taxed. This would be popular among high earning professionals including contractors who may currently view Inheritance Tax as an inhibitor to aspiration and ambition.

Entrepreneurs’ Relief

The cost of Entrepreneurs’ Relief (ER) in 2013/14 is £2.9bn: three times higher than HMRC’s estimated cost. Unexpected changes were announced in the Autumn Statement and it is possible that further announcements on ways to limit ER will arise.

Capital allowances

The Annual Investment Allowance is currently £500,000 but is due to fall back to just £25,000 on 1 January 2016. It is possible that the Chancellor may promise to extend the £500,000 limit if the government is re-elected.

Research and development tax credits

Changes to the system for claiming research and development R&D tax credits were announced in the Autumn Statement introducing a new advance assurance service for small companies from the autumn. Further assistance may be announced to help small companies undertaking R&D perhaps in simplifying the definitions of applicable costs.

Pensions and pensioners

The Prime Minister has announced that he wants to protect pensioner benefits. But there may be announcements about tax relief for pension contributions and limiting the contributions possible or the scope to only basic rate tax relief.

Watch this space

It is hoped that the 2015 Budget will finally address the realities faced by the freelancer and contractor community.The Federation for Small Business has been calling for policies to help small businesses grow, through tax reforms and sensitive changes to Minimum Wage rules. Of course Osborne needs to leave some rabbits in the hat for Wednesday and it may be that initiatives such as a further reduction to Corporation Tax (which would be welcomed by Limited Company contractors) are saved for the Conservatives’ Election manifesto.

Whatever happens in the 2015 Budget, we’ll publish our views on what it means for contractors after the announcement. Make sure you follow us on social media for the latest updates:

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What do you hope to see in this year’s Budget?

While we wait for the Budget, are you ready for the 2014/15 tax yearend? Download our new guide and get the most from being a contractor.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Top Tax Tips: Claiming pension from the company

Top Tax Tips: Claiming pension from the company

When it comes to tax savings contractor accountants will always recommend you take full advantage of all tax breaks available to you and your contractor limited company. One useful area for possible tax savings is claiming pension contributions directly from your company, rather than paying from your personal income.  Many contractor limited companies have just one employee who is a director operating under a contract of office, rather than a contract of employment, so will be exempt from the rules of compulsory employer pension contributions that apply to larger companies. However, paying pension contributions through your company can be very beneficial as part of your overall tax planning. It can help you make the most of tax allowances applicable to both you and the company and help you grow your pension fund value for the future.

Tax advantages of claiming pension from your company

To qualify for tax relief, company pension contributions must be made for genuine employees of the business. As most contractors are directors of their own contractor company they will legitimately qualify for this relief. Exact savings will of course vary depending on the level of contribution you make through your company, but you can potentially save tax in the following ways:

  • Employer pension contributions are as an allowable expense for Corporation Tax purposes, thus they reduce your company tax liability by £200 for every £1,000 contributed (assuming the company pays corporation tax at 20%).
  • Pension contributions are not a benefit in kind, so there is no tax or NI implications provided the limits are not exceeded (see below).
  • If you are within IR35 then pension contributions are allowable against your deemed salary, thus reducing the amount you need to take as wages.

Pension savings tax relief limits – Annual Allowance and Lifetime Allowance

To qualify for tax relief the total amount of your pension savings must not exceed the Annual Allowance limit in any tax year, so you or your contractor accountants may need to keep an eye on this. For the 2013-14 tax year the limit is £50,000 but this will decrease to £40,000 on 6 April 2014. HMRC allows you to carry forward any unused allowance from the three previous years before the current tax year, so with good tax planning you could avoid going over the allowance even if your current tax year’s pension savings exceed the limit. If your total savings do exceed your Annual and unused allowance, tax will be payable on the excess amount. There is also a Lifetime Allowance limit for pension savings. This is currently £1.5 million but will decrease to £1.25 million from 6 April 2014. These are unlikely to affect the majority of taxpayers, but again, if savings are over this limit a tax charge will apply to the excess. The most tax efficient pension contribution option for you and your company will depend on your individual circumstances and the details of the pension policy itself. If you have specific queries regarding the tax advantages of claiming pension through your company contact your contactor accountant for guidance. At Intouch we specialise in providing user friendly online accounting for contractors with limited companies. All our clients benefit from the knowledge and advice of our experienced contractor accountants which helps ensure they achieve maximum net yield from their contractor income.  Contact us to find out more about how we can help make your contractor accounting easier.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Comprehensive spending review: pensions

Pensions

One of the headline announcements in the spending review was that the state retirement age for men and women is to be equalised at 65 by November 2018.

The retirement age for both men and women will then rise to 66 by April 2020, some four years ahead of previous plans.

It is thought the move will affect more than five million people.

For the ten years between 2015 and 2025, the government estimates that the change will save some £30 billion in state spending on pensions and pensioner benefits, while raising an extra £13 billion in income tax and NIC receipts

Although it is to carry a 26 per cent reduction in its core budget, the Department of Work and Pensions (DWP) is to have the funds to introduce the planned new workplace pension scheme that will mean the automatic enrolment of all employees who are not already members of pension schemes.

The DWP will also set up the National Employment Savings Trust (NEST) which will manage the auto-enrolment scheme’s funds.

Taking on board the recommendations of John Hutton’s interim review of public sector pensions, the government is to raise the level of contributions made by employees.

The exact nature of the additional contributions will have to wait until Lord Hutton’s final report is submitted, but the Chancellor said that progressive changes to public sector employee contributions could see savings of up £1.8 billion by 2014/15.

The increases should be implemented from April 2012.

Elsewhere, the maximum award paid under the Pension Credit is to be frozen for four years as from 2011/12.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.