One of the most significant changes announced by the Chancellor in his 2012 Autumn Statement was a cut in the tax-free pensions contribution limits from the 2014/15 tax year onwards. How will this affect contractors and consultants?
New pension savings limits
From the start of the 2014/15 tax year, the lifetime savings limit for pensions will be cut from £1.5m to £1.25m.
The annual tax-free pensions saving limit will also be reduced – from £50,000 to £40,000.
This was a widely-anticipated cut, which will take effect just three years after the annual limit was previously slashed from £255,000 to £50,000.
Although this is clearly further erosion of one of the final remaining tax breaks available to freelancers, the Government says that these changes will only effect a small percentage of high earners. The changes will not come into effect for over a year, so you can still make use of the current annual limit during the 2012/13 and 2013/14 tax years.
You will also be able to make use of any unused annual allowances from thre previous tax years.
Experts unimpressed by pension change
Although the limit reduction is better than many expected (an annual limit cut to £30,000 was a possibility), Kingston Smith accountants note that the “controversial aspect of this change is that it affects entrepreneurs who have chosen to reinvest profits in the earlier years of their business careers and have eschewed making pension contributions to do so, understanding that they catch up with their pension planning in their 50’s and 60’s.”
Similarly, Tony Harris from our partner IFA, Contractor Financials, said that the Chancellor seems to have “ignored the reality of current demographic trends as we could all be funding ourselves through what could be a very long retirement.”
If you are interested in finding out more about your pension options, read out concise guide to contractor pensions, which includes a ‘finder’ form to get in touch with the Contractor Financials team.