When running your business, you’re mainly thinking about the here and now, and making most of your opportunities. And planning consists of the next 3 months, the next 12, and potentially up to around 5 years into the future.
As such, Pensions are not high on your agenda, but they should be.
When we talk to clients about pensions, we’re talking about money that you’ll need “tomorrow”, for or as part of your retirement, once you’ve started to wind down your business activities. Putting money aside now will give you the best opportunity for a larger pot of cash when the time comes, as the state pension is unlikely to be able to give you any type of freedom at £179.60 per week. (Current rate)
And the tax advantages?
Well, as a sole trader, and/or employee, paying money into your personal pension from your after-tax cash has 2 main benefits, alongside increasing the size of your pension generally
- The money will get topped up by the government, increasing your pot size.
- The threshold where you start to pay tax at 40% will move upwards, so more of your earnings will remain at the basic rate.
Personal pension contributions are however limited to your annual relevant earnings or £40,000, (whichever is lower), with any contributions above this limit attracting a tax called the annual allowance charge, which is added to your taxable income meaning a tax liability can be incurred.
And a Limited company owner?
A Limited company is likely to be making company contributions via the payroll for any staff as part of the employer’s pension obligations, auto-enrolling any staff members into a pension scheme where required.
But the company can also make direct payments to personal pension schemes, which can form part of a tax-efficient plan.
These company contributions are tax-deductible expenses in most cases and are not limited in scale or size as the normal personal contributions.
HMRC expect that these contributions to form part of the employee’s normal remuneration package.
Many businesses utilise these pension contributions as part of a tax-efficient plan, making monthly contributions throughout the year to the pension scheme, which is comfortable for cash flow, and when they are able, singular larger contributions to help bring the companies profits down for the tax planning part.
The employers/company contributions to the personal pension scheme do not get topped up by the government, however are saving the company corporation tax by reducing down the profits.
Pension contributions are often used in tandem with other tax-efficient strategies, and the timings of the payments form another part of this plan.