This guide focuses on pensions considerations for owner-directors of limited companies.
We've also collaborated with Redbourne on a separate guide addressing your pension obligations to your employees when you're starting out in business, which you might also find useful.
Once your business is established, then owner-director remuneration strategies need careful planning, because there are some neat benefits that you'll kick yourself if you miss!
Who are owner-directors, and why should they have a pension?
Tax efficiencies from pensions
You'll be able to structure your remuneration in a more tax-efficient manner than if you were just an employee under the PAYE system.
So not treating yourself as straightforward employee can be really beneficial.
How does that work?
You can achieve greater tax efficiencies through balancing a combination of:
your 'P11D' benefits
(These are employee benefits that they may receive outside of salary, for example, healthcare benefits, interest-free loans (to cover bicycle purchases or season ticket travel costs), company car allowances, etc.)
drawing a dividend from the business
potentially awarding yourself a bonus and
making pension contributions (which receive the most favourable tax treatment of all these elements).
Pensions are good for owner-directors
UK legislation currently empowers employers to make significant pension contributions on behalf of owner-directors, without the need to have matching PAYE income. This means that:
- the company normally attracts tax relief on the contributions made
- the owner-director isn't taxed on the contributions either, and
- those contributions can then be invested into a pension fund which grows tax efficiently.
This covers sole directors, who also happen to be the sole employee of their businesses, but also founder-directors who have fellow directors and other staff who are all also employees.
Those who would not be covered are non-executive directors, as they are not employees.
An additional significant benefit...
...is also that in the event of the owner-director's death, a pension fund created in this manner should be available to the family as a tax free lump sum.
Facilitating bigger contributions
The UK pension rules allow individuals who are not higher earners (which is defined as earning income of less than £110k per annum), to make tax-efficient pension contributions, either personally, or from their company on their behalf, of up to £40,000 in any year.
In addition, you may also be able to play 'catch up' on those contributions, if you haven’t paid the maximum £40,000 into your pension in the last 3 trading years, but you've just had a very good year and now have some funds available.
The surplus availability can simply be rolled up and you'll be able to contribute funds totalling that 3-year surplus amount in to your pension.
More information can be found on the government's website following this link.
This can lead to some very attractive tax planning. It's definitely worth a chat with an expert if you're in that position.
Funding a business property purchase
A little known benefit is that you can also potentially use your pension schemes to help fund a future commercial property purchase for your business.
Pension funds can invest in a wide range of investments. Commercial property purchases via a pension scheme often attract far more favourable tax benefits for you as well, by contrast to you buying the property personally or via your business.
The key benefits include that:
pension contributions via a company, attract tax relief at source (so the company is not paying tax on them)
pension funds grow tax free, so any interest is channelled straight back into the fund, not reduced by any tax liabilities
pension funds can borrow a further 50% of their value to help finance property purchases
any mortgage is in the name of the pension scheme, and is paid off via the rent received
(In this instance, the rent from the tenants is essentially used to pay off the mortgage on the property, and so increases the value of the fund.)
tenants must pay a commercial rent, which is tax free income for the pension fund
rents paid by tenants are normally tax-deductible by the tenant business, meaning that if you're a business tenant, your rent payments are an allowable expense (like salaries) against the trading profits of your business, which in turn reduces your corporation tax bill
any growth in the value of the property is exempt from capital gains tax
the value of the pension fund, including the property, is free from inheritance tax.
Professional advice is highly recommended if you're interested in using a pension fund to purchase property for your business.
Pension death benefits
It's not a nice one to think about, but you do need to be aware of how your pension fund could be passed on to your chosen beneficiaries in the event of your death.
When managed well and placed in good schemes, pension funds can grow rapidly and be worth significant sums.
And recent changes to the UK laws have made the benefits of pensions on death even more attractive.
For example, in the last few years pensions have become inheritable, so the value of the fund can pass to spouses or to close family members, often without any tax liability. This very much depends on the personal circumstances, and needs proper advice, however this development can bring significant protection to your family.
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