Tax year end is only 12 days away!
For many Freelancers, tax is the biggest single issue you face. Pension investment gives you a great opportunity to reduce the amount that the tax man will be due next January and there is still time to act before April 5th…
As you may have found since you left permanent employment, tax is even more painful for Freelancers because, unlike a permi, it is you who physically must write the cheques to meet the income tax, pay any employers and employees National Insurance that is due and then settle the corporation tax bill too.
After you have drawn enough salary and dividend income to meet day to day needs, an employer contribution into your pension can offer you a means to reduce or avoid altogether the corporation tax that your company is otherwise liable to pay on any excess profit. Alternatively you can draw extra dividend and make the pension contribution personally, gaining income tax relief in the process although it does need to be remembered that this route enables you to only invest a maximum of 100% of what could very well be a low salary, whereas a company investment has no link to salary.
You obviously need to bear in mind that once invested, pension monies are largely inaccessible until you reach 55 but depending on your circumstances, you can potentially invest up to a massive £255k until April 5th. Any sum invested could not only make a potentially significant difference to your retirement fund but will also have allowed you to transfer money from company into personal hands very tax efficiently.
It is unlikely that Contractors will ever be able to invest anything like this amount of money into a pension in one tax year ever again because from 6th April 2011 a new annual allowance of £50k will apply sadly. Freelancers must also be aware that complex ‘input period’ rules may already apply to them which mean that they will already fall under the new annual allowance. In certain circumstances there do seem to be steps that can be taken before 5th April to change the dates that determine which allowance applies to contributions you make in 2010/11 however.
You could also consider investing in an ISA before the tax year end as these tax efficient wrappers currently allow an investment of up to £10,200 of which up to £5,100 can be in cash (rising to £10,680 and £5,340 respectively from April 5th) but unfortunately an ISA must be funded from post-tax income so won’t help soften the blow of those tax bills next January. You won’t be charged tax on growth in your portfolio however, which over the long term could help ensure you keep more of any profits you make.
Venture Capital Trusts and Enterprise Initiative Schemes must also be funded from post-tax income but do attract income tax relief of what will soon be 30 % on both investments and these may well come into their own for those Contractors who find the new annual pension allowances too restrictive.
As there are few remaining tax breaks available to Contractors you should grasp the opportunity to invest in your pension if at all possible because not only will it make all the difference to the tax take you suffer, it will also ensure that you put some of your hard earned contract income away for the future.
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