September 25th, 2017
As of late, I have encountered a couple of repeat questions from my clients, which is unsurprising given the number of changes that are constantly being implemented, so rather than provide you with an article, I have this time decided to answer a couple of the common questions that the contracting world seem to have around pensions and mortgages;
Through my limited company, I take a low salary and dividends. How much am I able to contribute to a pension as the company director?
When working out the amount that an individual can contribute in to a pension, 100% of the salary can be used up to an annual contribution maximum of £40,000, receiving basic rate tax relief at source, and claim any additional tax relief through your self-assessment. The benefit you will receive when making contributions through your limited company is, despite your dividends not being counted as salary towards the pension contribution limit, you are still allowed to contribute the full £40,000 per annum when you are making the contributions through your limited company. When making these contributions from the limited company, you do need to prove that the contributions are ‘wholly and exclusively’ for business purposes, but as the shareholding director you shouldn’t encounter any issues with this.
Making these contributions from the limited company, you will receive Corporation Tax relief, meaning that you are going to make a 19% tax saving on all monies contributed, and don’t have to pay income or dividend tax on drawing the money from the business. This is the most effective tax wrapper available for your investments, and means that in using your current years contribution allowance of £40,000, you could potentially make a tax saving of £7,600, which, no matter what your companies turnover, is a significant amount of tax to save, whilst also ensuring that you are going to have some funds for your well earnt retirement.
The removal of the SA302 by HRMC, how will this affect me and what can I do about it?
As you may or may not know, as of the 4th September the HMRC will no longer be producing the SA302 document, which was used by many contractors when applying for mortgages to prove income. This means that the documents that you use, will now be different.
Providers are now willing to accept alternative documents from self-employed people, and directors of limited companies. For a limited company contractor, the ability to borrow is based on the day rate, and this can be proved using documents such as contracts with end clients providing the day rate being paid, and accounts provided by the accountant. Similarly, for Self-Employed people, they can provide documents such as accounts which have been completed by themselves when preparing returns, and other documents such as tax overviews proving income they are in receipt of. The documents required do vary between providers, but they are aware of the removal of the SA302 and are working around this issue, meaning that people still can borrow as before the removal.
The value of investments may fall as well as rise and past performance is not a guide to future returns.
Financial advice is given by Contractor Wealth Management Limited. Registered in England and Wales under Company number 07773485 at 9 London Road, Southampton, England, SO15 2AE. Contractor Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority under FCA Register reference 582895 and is an appointed representative of Intrinsic Financial Planning Limited; on the FCA Register under reference 440703 and Intrinsic Mortgage planning Limited as reference 440718.
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