The 18th to 22nd of November 2019 was Talk Money Talk Pensions Week, which aims to make people more comfortable with the prospect of discussing their finances, and improve their financial health.
Financial knowledge is important for contractors to have – particularly those who work through a limited company.
Here is some basic savings and pensions advice tailored for contractors and freelancers:
Saving Money as a Contractor
Contractors don’t get paid when they don’t work, so being proactive with savings is essential.
When considering how to save, you should shop around for the best interest rates. The best rates are usually reserved for accounts that lock away your money for longer, or require you to give notice when you want to make a withdrawal. On the other hand, easy access accounts can be a good back up for a rainy day.
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.
Types of savings accounts
Easy-access savings – Easy-access savings give you more control over your savings in the short-term, so they’re a good option for sickness and/or holidays. However the interests on easy-access savings are usually lower and may have a monthly deposit limit tacked on. Therefore it may be worthwhile having a higher-returning savings pot elsewhere on top of this.
Cash ISAs – Cash ISAs are a good option for future planning as they are flexible, the interest is always paid tax-free and their value increases over time.
The interest rates on regular savings accounts could be better than a cash ISA, so these are worth looking at as an alternative.
Notice accounts – Notice accounts require you to give notice to the provider to make a withdrawal; these terms are usually 30, 60 or 90 days. The nature of these types of accounts is such that the money is worth more if kept in the account for as long as possible, hence the notice period.
Regular accounts – Regular savings accounts require you to deposit money every month, but are a good starting point. The interest rates can be fixed are variable, and there may be a deposit or withdrawal limit over the course of the year.
Fixed-rate bonds – If you’re happy to lock away your funds for longer, fixed-rate bonds could be a good option. Although the interest rate will be static, these accounts usually offer some of the highest interest rates. You will have to consider whether you want to sacrifice access to your funds for a set period of time.
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 for a maximum bonus of £3,000. The government will not allow any new Help to Buy accounts to be opened after 30th November 2019.
These 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
Limited company contractors 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 your pension.
Despite the tax saving opportunities, 86% of freelancers struggle to plan for their retirement.
Pension options for contractors
Employer Contributions (limited company) – You can easily pay into an employer pension scheme directly from your business account, and doing so will save you 19% on Corporation Tax. This option is popular for limited company contractors as it allows for greater tax-efficiency.
Personal pension schemes – You can also contribute privately to your pension after income tax and National Insurance. You won’t lose out on tax savings though, as the government will still top up your pension at the rate of the tax band you are in.
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
Flexible pension schemes allow for ad hoc contributions, changes to monthly deposit amounts and the option to pause payments. Alternatively a more consistent setup allows for greater control and peace of mind – the best option depends on your earnings and working status.
Speak to a financial adviser
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.
Bluebird’s accountancy-software package includes your own dedicated Account Manager who can provide you with tailored tax planning and advice with regards to your limited company finances. With the low cost service and innovative software, you can maximise your limited company earnings and still receive the support you need as a contractor.
We do not offer personal financial recommendations so if you wish to discuss what you’ve read here please contact a financial adviser.
Contact us for more information on operating through a limited company or try our take home pay calculator to get a breakdown of your take home using our service.
Want to find out more about Talk Money Talk Pensions? Visit the Money & Pensions Advice Service.