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When you are self-employed, you are solely responsible for finding and signing up to a pension scheme. A pension will not only provide you and your family with more financial security, but they can also offer a small amount of tax relief.
Here are a few important things that contractors should consider when thinking about their pension...
1. Are you already enrolled in a scheme?
The automatic enrolment pension scheme requires that employers must enrol any employees aged between 22 and State Pension age who work in the UK and earn more than £10,000 a year. They must also pay some of the minimum total contribution.
If you are contracting through an umbrella company like us, you are classed as an ‘employee’ of that company and therefore you are automatically enrolled in a scheme. You do however always have the option to opt out of the workplace pension.
If you are the sole director of a limited company, your business is exempt from automatic enrolment as you are not classed as an employee.
If your limited company has more than one director, the business will still be exempt so long as none of the directors have an employment contract, and the company has no other employees with one.
In either case, you should receive a letter from The Pensions Regulator, and you will need to respond to this in writing with your letter code, PAYE code and Companies House number to explain that you are exempt from auto-enrolment. They will then issue you a confirmation and you can proceed with your pension contributions however you wish.
If your limited company has shareholders, they are usually not on the company payroll and so they are not generally classed employees. This also means you will be exempt from auto-enrolment, but you should still inform The Pensions Regulator in writing.
Remember that you are allowed to belong to multiple pension schemes so you can also contribute to a personal pension, even if you’re a member of a workplace pension scheme. You can also track down old or lost pensions using the Government’s Pension Tracing Tool.
2. Which pension provider should you go with?
Who you choose as your pension provider is of course up to you but your scheme must be flexible to allow for the changeable nature of a contractor’s work. This means that any pension scheme you sign up for should give you the freedom to start and stop contributions as required, as well as increasing or decreasing from a month to month basis where needed. You also need a provider that has a good track record and will stick around long term.
3. Should you make individual or company contributions?
Once you’ve registered, you can either make contributions as an individual or through your company. Contributing from personal funds or on an individual basis will mean that the amount you invest will attract personal tax relief. This means that your provider will usually top up your contributions.
However, it is more efficient to contribute to your pension fund through your company, as this money is invested before tax. This means that you save on income tax and you might also be eligible to claim corporation tax relief (subject to limitations).
4. What are the maximum pension contributions?
You can pay as much into any of your pensions as you like but there are some rules. Firstly, in order for the contributions to remain tax-free, the amounts that you invest must not exceed the annual allowance. This is currently capped at £40,000. If you exceed the annual allowance, you won’t receive tax relief and you will be subject to an annual allowance charge. You can ask your scheme to pay this from your benefits but that means your pension scheme benefits will be reduced. However, once you have used your annual allowance, you may ‘carry forward’ any annual allowances unused from the previous three years.
Secondly if you are contributing through your company, the amounts that you invest must not exceed your company’s income for the year. Otherwise this will lead HMRC to question whether the amount came from the company’s activities.
5. When and how can I withdraw from my pension?
In most cases, contractors can access their pensions and begin withdrawals at the age of 55. This can help you to top up your income if you’re still working, or if you’ve saved enough, you could retire early! You should always with your pension provider to clarify your terms though.
Remember, one of the benefits of working with NWM is that we automatically enrol you in a pension scheme with our nominated pension provider. We will contribute 5% Employee deductions after the first 12 weeks postponement. You can always choose to pay in more than the 5% and you may opt out of the scheme should you wish.
If you’re interested in joining us, talk to our team today.