Contractors and freelancers working through a limited company can benefit greatly from taking initiative with their pensions. However, a recent report warns that freelancers are not saving enough for their retirement.
Despite many young contractors and freelancers aged 25-40 wanting to retire by age 64, research by Censuswide indicates that some may have to work until they’re 79 years old.
Why contractors and freelancers are falling behind on their pension savings
Nearly half of freelancers and contractors polled say they haven’t even started saving for their pensions yet. Why?
One reason is that perhaps the nature of contract and freelance work is more short-sighted. Contractors generally worry about building up savings for the time between contracts, creating a portfolio of clients and chasing after their next role rather than thinking long-term.
In fact, 86% of freelancers said that it’s difficult to plan for retirement because their income is unpredictable. A further twenty-eight per cent say finding financial advice tailored to them as a freelancer is tough. If you plan smart though, you can still enjoy the benefits of contracting and freelancing while saving for retirement.
Delaying starting a pension pot could have negative implications. Not putting aside funds for the future now will only lead to problems later in life – being that you may need to work to an older age to save enough to live a comfortable retired life.
In contrast, 91% of full-time employees have opted into auto-enrolment pensions
Auto-enrolment pensions are a legal requirement for permanent employees. They help employees prepare for retirement by automatically putting away a percentage of earnings. The employer must also contribute a percentage to the employee’s pension.
But how do contractors and freelancers, who technically have no employer, save for their pension?
There are actually tax benefits to saving for a pension if you have your own limited company, which you should start taking advantage of now.
How to save for your retirement as a contractor
One option to save for your retirement as a contractor is to make employer contributions to a pension pot through your limited company. By paying into your pension directly from your limited company bank account, you can make a Corporation Tax saving of 19%.
Another option is to set up a personal pension scheme, whereby you will pay into your pension fund after income tax and NI is paid. HMRC gross the contributions and pay the extra amount into your pension directly.
There is a maximum allowance for tax-free pension contributions within a tax year (6th April to 5th April). This is currently £40,000 per year or up to 100% of your salary for personal pension schemes.
Umbrella company users will be auto-enrolled into the umbrella’s chosen pension scheme. If you have a personal pension scheme already in place, you can choose to opt-out of the umbrella company’s scheme.
Which pension option is better for me?
The tax benefit to contributing via your company vs you personally are very similar. Many contractors and freelancers choose flexible pension schemes which allow you to adjust your contributions to suit your work circumstances. If you’re not sure which option is best, seek the advice of a financial advisor.
Budgeting is key
If you’re worried about putting money away for your pension due to income uncertainty or lack of education around your options, start by downloading an app to help you budget. Apps such as Multiply can help you work out potential pension contributions based on several income variables – including freelance-style work.
Or until you’ve worked out a set plan, banking apps such as Revolut have tools like the Vault, where you can instantly save your spare coins in a separate ‘account’. Tools like these will get you used to the idea of putting money aside to benefit far down the line.
Get your own personalised tax plan
As a limited company client at Churchill Knight, you can receive a personalised tax planning call with a dedicated accountant. They will assess your working circumstances and work with you to devise the best tax strategy for you – including tax-free pension contributions.
Contact a Churchill Knight expert today to learn more about our contractor accountancy service, and get a free personalised take home pay calculation.
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* Calculator for illustration purposes only and uses assumptions. Limited figures based on 52 weeks, expenses £50 per week, £9,100 salary and accountancy fees included. As of 1st April 2023, there is no longer a single rate of Corporation Tax. The calculator uses assumptions and estimates and is designed to be accurate by individual circumstances will vary. Umbrella figures based on 52 weeks, £15 per week margin and holiday pay paid out. For a more accurate calculation tailored to your requirements, please contact Churchill Knight today by calling 01707 871 622 or contact us here.
