Budget (3): Pension changes could encourage older contractors to return

Budget proposals to change pension allowances to encourage early retirees back into work could benefit older contractors thinking of returning to the work-place.

The Chancellor Jeremy Hunt announced a two-prong promise to make pensions more attractive to higher earners:

• To abolish the cap of £1.07 million on the amount workers can accumulate in pensions savings over their lifetime before having to pay extra tax; and
  
• To increase the tax-free yearly allowance for a pension pot from £40,000 to £60,000.

Matt Fryer of contractor accountants, Brookson Group, saw positives for contractors in this. He said: "It was perhaps of little surprise (and perhaps relief for some) that there were no targeted measures announced in the Budget directly impacting the UK's flexible labour market.

"Given the scrutiny on the sector over recent years a period of certainty around the tax treatment of contractors is not a bad thing. The Government has however missed the opportunity to tidy up some of the complications associated with the off-payroll rules. There was no mention of umbrella company regulation, however, it is widely expected that this is something which will be progressed in the near future.

"Perhaps the main measure of note to pick out would be the increase in the annual pension allowance from £40,000 to £60,000. This will be of benefit to all high earners and is a common tax planning technique for contractors, both those operating via a PSC or umbrella. In my view it is likely to attract some over 50s back into contracting, even into inside IR35 contracts via umbrella companies.

"This is because high earning umbrella employees will perhaps be the biggest beneficiaries of this measure as they will now be able to access even greater tax and NIC savings if they are able to enter in to pension salary sacrifice agreements with their employer."