Benefits of company pension contributions for IR35 contractors

Guest blog by Caroola Financial Planning

If you’re a contractor affected by IR35, leveraging company pension contributions can offer several financial advantages. Here’s a guide to help you understand these benefits. 

1. Tax Efficiency 

• Pre-Tax Contributions: Pension contributions are made before income tax is applied, reducing your taxable income. This can significantly lower your overall tax liability¹. 
  

• Tax Relief: Contributions to your pension receive tax relief at your highest marginal rate. For example, if you’re a higher-rate taxpayer, you can get 40% tax relief on your contributions². 

2. National Insurance Savings 

• Employer Contributions: When your company makes pension contributions on your behalf, these are not subject to National Insurance Contributions (NICs). This can result in substantial savings for both you and your employer². 

3. Long-Term Financial Security 

• Retirement Savings: Regular pension contributions help build a substantial retirement fund, ensuring financial security in your later years². 

• Compound Growth: The earlier you start contributing, the more you benefit from compound growth, potentially increasing your retirement savings significantly over time². 

4. Flexibility and Control 

• Investment Choices: Many pension schemes offer a range of investment options, allowing you to tailor your pension investments to your risk tolerance and financial goals². 

• Access to Funds: From age 55 (rising to 57 in 2028), you can access your pension funds, giving you flexibility in managing your retirement income². 

5. Mitigating IR35 Impact 

• Reducing Taxable Income: By increasing your pension contributions, you can reduce your taxable income, which helps mitigate the financial impact of being caught by IR35¹. 

• Retaining More Income: Instead of paying higher taxes, you can retain more of your income by diverting it into your pension, benefiting from tax relief and NIC savings¹. 

Example Scenario 

Imagine you earn £125,000 annually and are caught by IR35. By sacrificing £25,000 of your salary into your pension, your taxable income reduces to £100,000, you regain your personal allowance and save £15,000 in tax and up to a further £3,750 in employer and employee NI. This not only lowers your income tax but also reduces your NICs, resulting in overall tax savings¹. 

Considerations 

Contribution Limits: Be mindful of the annual pension contribution limits (currently £60,000 for 2024/25). Exceeding these limits can result in additional tax charges². 

Impact on other benefits: Reducing your salary might affect other benefits like statutory maternity pay or mortgage applications.