This week (18th to 22nd November 2019) is Talk Money Talk Pensions Week in the UK. The goal of this week is to ease the discomfort around talking about money and motivate people to be more active in their financial wellbeing.
Financial savviness is important for contractors to have – particularly those who operate their own companies. If you have your own limited company, the importance of being proactive with savings and pensions is greater.
For Talk Money Talk Pensions Week we’ve put together some tailored advice to help you on the path to financial wellbeing.
Saving Money as a Contractor
Contractors don’t get paid when they don’t work, so having savings is highly important.
When considering how to save, you should shop around for the best interest rates. The best offers are usually for accounts that lock away your money for a specific amount of time, but having an easy-access account as well may be a good idea for emergency access to funds.
Everyone is entitled to a personal savings allowance. Basic rate taxpayers can earn up to £1,000 interest on their savings per year before paying 20% tax, while high-earners can earn £500 per year before the 40% tax applies (this is separate from ISAs which also have tax-free interest).
Types of savings accounts
Cash ISAs – Cash ISAs are a good option for future planning as they are flexible and their value increases over time. Plus all ISA interest is tax-free, even if you earn £5,000 on the amount saved, for example.
Regular savings accounts are worth a look in case the interest rate offers are better (all banks started paying interest tax-free in 2016).
Easy-access savings – Easy-access savings allow you to have speedy access to your savings, so they’re a good option for a rainy day or to cover sickness and/or holidays. However, the interests offered are generally lower and you may have a monthly limit on how much you can deposit. As a contractor you may wish to have your money spread across easy-access savings and other types of accounts.
Notice accounts – These accounts require you to give advanced notice to the provider when you want to make a withdrawal. These terms are usually 30, 60 or 90 days. Money in these accounts is worth more if kept in the account (hence the notice period) so notice accounts aren’t recommended for emergency savings.
Regular accounts – Regular savings accounts are a good starting point but require you to deposit money each month without fail. Interest rates on regular savings accounts can be fixed or variable, but while there are plenty of options in this sense you may be limited by what you can deposit or how many withdrawals you can make in one year.
Fixed-rate bonds – Fixed rate bonds offer a fixed interest rate over a set period of time. These usually offer the highest interest rates however you will sacrifice having access to your money during this time – for example for one, two, three or even five years. Fixed-rate bonds are a good option for long-term financial planning but not for emergency finances.
Help to Buy ISA – The government’s Help to Buy ISA allows you to deposit up to £1,200 per month in an account to receive a 25% boost on your savings. You can get up to a £3,000 bonus when you apply for your mortgage through this savings account, which will be applied when you are buying your first home. The government will not allow any new Help to Buy accounts to be opened after 30th November 2019.
Read more about getting a mortgage as a contractor.
The above are just a few basic options of the types of savings you can have. You may choose one or multiple types depending on how you want to save. Research and speak to your financial adviser to find out what’s best for you.
Saving for your pension as a contractor
Contractors working through a limited company are responsible for setting up their own pension scheme, and can benefit greatly from maximising the annual pension allowance.
You can contribute a maximum of £40,000 per year tax-free (or up to 100% of your salary) towards a pension scheme, and you can carry forward unused allowances from the previous three years if you were in a pension scheme.
Despite the tax advantages available, 86% of freelancers find planning for retirement difficult due to income uncertainty. Saving for retirement isn’t any less important as a contractor, so you should equip yourself with the right knowledge to start now – which is a big reason why Talk Money Talk Pensions Week exists.
Note – if you’ll be working through an umbrella company, the provider will automatically enrol you into their registered pension scheme after 12 weeks.
Retirement saving options as a contractor
Employer Contributions (limited company) – You can pay directly to your retirement scheme from your business bank account and receive a 19% Corporation Tax saving on the contribution. This allows you to be more tax-efficient – which is why it’s the most common option for limited company contractors (working outside IR35).
Personal pension schemes – Contributing privately into your pension is done after income tax and National Insurance has been paid, but you still get tax relief on your contributions. For example if you contributed £1,000 into your pension personally, the government will give you tax relief so you can still benefit from tax savings.
The following tax relief applies in England, Wales and Northern Ireland:
- 20% for basic rate taxpayers
- 40% for higher rate taxpayers
- 45% for additional rate taxpayers
Many contractors prefer flexible pension schemes that allow for ad hoc contributions, changes to monthly deposit amounts and the option to pause payments. Alternatively you may prefer the stability of regular payments into a pension pot regardless of your working status or earnings.
Speak to a financial adviser
The best savings and pension options for you depend on your appetite for risk and how you wish to access your money in the future. It’s advised to seek the professional advice of a financial advisor to come up with the best plan for you and the future you want.
If you’re a contractor with your own limited company, we can give you tax planning advice as part of our accountancy service. This will help you understand how to legally maximise your earnings through your company. We do not offer personal financial recommendations so if you wish to discuss what you’ve read here please contact a financial adviser.
Want to find out more about Talk Money Talk Pensions? Visit the website of the Money & Pensions Advice Service.
Try our take home pay calculator to see how you can maximise your income through a limited company: