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Contractor pensions can cut your tax bill substantially

Contractor pensions can substantially reduce your tax bill as well as providing a retirement income for your future. Ralitsa Bargazova from Freelancer Financials tells us why contractors still have time to take advantage of pension planning opportunities.

Like most contractors, you will be interested in how you can cut your tax liability.

With the tax year fast approaching, contractors may be losing out on one of the few non contentious tax breaks still available.

By investing in a pension you could reduce your annual tax bill by thousands of pounds, in addition to extracting wealth from your business tax efficiently.

Since the simplification of pensions was introduced in April 2006 "A Day", a significant amount of flexibility has been added to pension investment planning. You can now invest cash from either your business or personal bank accounts and enjoy tax relief of up to 48%.

How much can I invest in a pension plan?

Nearly everyone can personally invest £3,600 each year in a pension irrespective of salary and get tax relief on the contributions. However, personal contributions over £3,600 must be supported by a salary that is at least equal to the level of pension investment in order to receive tax relief.

Limited company contractors

In the case of contractors operating through their own company, tax relief on contributions made into pensions is limited only by the annual allowance (currently £245,000, but will be raised to £255,000 in April 2010).

Funds are diverted into the pension plan pre corporation tax which is particularly beneficial for those expecting to pay additional income tax on dividend payments.

The future of pensions for contractors

Pensions are one of the few methods of tax planning that are actively supported by all Political parties. The authorities are in favour of the concept of individuals taking responsibility for the provision of income in retirement and will do what they can to encourage it. This includes "one person limited company" contractors and self employed workers.

More information about contractor pensions can be found in our resources section. Alternatively, Ralitsa Bargazova can be contacted on 020 8421 7993.

Story by Freelancer Financials. Independent providers of financial services to freelancers and contractors.

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Image: Rangiroa, pension Teina et Marie
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