Knowledge

The “Non-boring” guide to pensions for small business owners!

Whenever most people hear the word pension, they think of free bus passes, zimmer frames and slippers… (just saying!) 

 

But a pension offers very attractive tax breaks, and you don’t need to be retiring to make use of them all.

 

Before we start it’s worth noting that the tax benefits of pensions are one thing, but prudent retirement planning is quite another. So if you’re about to leap into the world of pensions you might want to speak to a specialist.

 

Do something now!?

 

“The sooner you act the better off you will be” that’s what all the experts tell us. 

 

Yeah? No sh*t sherlock, I don’t need to be Carol Vorderman to know that the longer I save money the more I’ll have.

 

Anyway, all of us entrepreneurs are going to sell our business for millions and live off the proceeds right?

 

Maybe, but retirement planning is only one aspect of a pension. Pay in, save, let it grow, yada yada and you can be living the retirement of your dreams. (Interestingly I bet many read this would never dream of retiring, we love the game too much!)

Tax saving

 

This is more like it, how can we be better off now? How can we pay less tax?

 

The first thing to know is that the government likes you to have a pension, it means you’ll look after yourself when you are older and pay all that lovely money back into the economy. 

 

So they tend to offer pretty decent incentives to pay into one.

 

As an employer you need to pay into your employee’s pension, but what about as a business owner?

 

You aren’t obliged to, but there are some juicy tax savings if you do!

 

Allowable business expense

 

If you chose to pay your pension contributions directly from the limited company they are treated as an allowable business expense, and we all know what that means… yes they will offset your corporation tax bill, potentially saving 25% in tax.

 

There’s more because employers don’t pay national insurance on pension contributions, so you save around 13.8% there too.

 

Total possible saving 38.8%!

 

Sounds good – how much can I pay in?

 

The annual pensions allowance is currently £40,000 or 100% of your income, whichever is lower. You can also take advantage of the carry-forward rule. 

 

This lets you go back 3 years and take any unused allowance.

 

(There are some things to be aware of and certain rules to stick to, so make sure you get some advice first, but those are the broad benefits.)

 

That’s all very well and good but I can’t use that money until I retire?

 

Aha, this is where things can get a little tricky and complex. But as an example:

 

You could set up a Small Self Administered Scheme (SSAS)

 

This is a trust-based pension that allows you to do various things with your pension pot. Including… loaning back 50% of that pot to your business. (I can see those cogs turning!)

 

Another potential great tax saving is to take out an interest-only mortgage and pay into a pension at the same time.

 

Then when the mortgage ends, you effectively have a tax free pot to pay off the mortgage with.

 

Pensions are useful but can be tricky to work out. 

There are so many tax advantages and opportunities, but like everything, it depends on your circumstances as to whether you can or should use them.

 

If you want to know more, give us a call. We can very quickly show you any quick tax wins you may be missing and potentially recommend changing a few things to make some serious savings! That’s what we do and what we’re good at 🙂