You’ve invested years as well as considerable time and effort building up your business. So, the question now is: how do you extract the profits in the most tax-efficient way? The simple answer is, pension contributions.
If you have a limited company, contributing to a pension can bring significant tax advantages. Pension contributions can be treated as an allowable business expense and offset against your company’s corporation tax bill.
Whilst Business Asset Disposal Relief (BADR) Relief offers an attractive tax benefit to individuals (subject to certain criteria) and is available on business sales at 10% up to a value of £1m, it’s worth remembering that this money has already been subject to Corporation Tax and so the net proceeds are reduced and can take a considerable slice of your hard-earned profit.
- What are the tax benefits?
- Attractive schemes for directors
- What is a SIPP?
- Benefits of a Small Self-Administered Scheme (SSAS)
- Further benefits to saving in a pension
- Bringing your premises into your pension scheme
- Is there a limit on contributions?
- Safe and secure
- Important things to remember
If you run your own business, you can make personal contributions to a pension or you can make contributions through your company, with both options bringing significant tax advantages. For Company Directors, there are numerous benefits of doing so in terms of tax and control: -
- Company Directors have a range of sophisticated options available to them, over and above those offered by a default Auto Enrolment employee scheme
- Contributions for Directors can be made by the Company as an Employer Contribution
- Company Directors have the ability to control the timing and amount of contributions
- Pension contributions are deductible against Corporation Tax
The pension schemes available to Company Directors are attractive in that they are able to hold a much wider range of assets than workplace and personal pensions.
These arrangements can invest in shares listed on any HMRC recognised stock exchange; investment funds such as unit trusts and open-ended investment companies (OEICs) deposit accounts with any UK authorised financial institution as well as commercial property including land.
Pensions for Company Directors can be arranged on either a personal or group basis.
A Self-Invested Personal Pension (SIPP) offers more control to you as a Director and a wider investment universe than workplace pensions or Personal Pension Plans.
When paying into a SIPP from a limited company, you could make employer pension contributions directly from your company. Your limited company SIPP pension contributions can come from pre-taxed income so by paying money directly into your pension, rather than paying in from your salary, you could gain greater tax efficiencies.
If you are a higher or additional rate taxpayer, you can pay money straight into your pension via salary exchange, instead of declaring the income as profit and taking it out as a dividend.
For some businesses with specific needs it may be that a Small Self-Administered Scheme (SSAS) is more appropriate. These arrangements offer a “pooled” approach for up to 11 members meaning that as a Director of an SME you can combine resources to purchase commercial property whilst retaining your own ear-marked fund.
Both SIPPs and SSASs benefit from the ability to be able to borrow up to 50% of the net assets of the scheme, which is another useful feature when considering commercial property investments.
Savings inside a pension receive considerable tax incentives:
- no Capital Gains Tax on growth
- no tax on income received and
- pensions aren’t subject to Inheritance Tax
It is very possible that you will never pay tax on any of the funds invested within your pension.
Also worth considering is the fact that employers don’t have to pay National Insurance on pension contributions. The National Insurance rate for 2023/24 is 13.8%, so by contributing directly into your pension rather than paying the equivalent in salary, you save up to 13.8%.
This means that in total, your company can save up to 38.8% by paying money directly into your pension rather than paying money in the form of a salary. Depending on your circumstances, this may or may not be more beneficial to you than paying personal pension contributions.
A popular and tax efficient solution is for the pension scheme to purchase the property your business operates from. In this case all the tax benefits described above continue to apply whilst the employer pays rent to the pension scheme, thereby making further savings against Corporation Tax.
Add to this the investment flexibility that a director’s pension can provide and in certain circumstances the ability to make commercial loans back to the company, directors’ pensions can double up as a very useful business planning tool.
The amount that can be contributed to a pension and receive tax relief is £60,000 per annum. Once the current year’s allowance has been used, any unused allowance from the previous three years can be brought forward.
Pensions are held in trust so it is not normally possible for creditors to make a claim against your pension scheme unless it can be demonstrated that the funds were invested with the intention of avoiding a claim. Provided your contributions have been regular and made for the purpose of providing retirement benefits, your pension fund is safe and secure for your benefit regardless of what happens to your business.
- Saving for your future is in important part of financial planning, and it should be done as tax-efficiently as possible
- As a business owner there are many schemes available to you with attractive features you can benefit from that are not available within a normal employee pension scheme
- Pension contributions are one of the most tax efficient ways of doing this whether it be contributions paid by the business which qualify for corporation tax relief, or personal contributions which qualify for tax relief at your highest marginal rate
- You can access your pension from the age of 55 and there are a number of different and flexible options available, including drawdown
As Independent Financial Advisers with access to the whole of the market, Tees Wealth is perfectly positioned to recommend you the most suitable arrangements according to your business needs and individual circumstances. If you would like an informal chat at no cost or obligation, please don’t hesitate to get in touch.
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Chat to the Author, James Appleby
Managing Director at Tees Wealth, Bishop's Stortford officeMeet James