Pension scheme

A brief pension guide to directors of a limited company

If you're a director of a limited company but haven't made pension contributions through your company, you could be missing out.

In the UK, under the Pensions Act 2008, every employer is required to enrol eligible staff into a workplace pension scheme and contribute towards it.

Pensions provide a win-win situation for both employers and employees. As the aim is to encourage individuals to save for their retirement, pensions allow your employees to get tax relief when you (the employer) take workplace pension contributions out of their salaries before deducting Income Tax. For a company, pension contributions reduce your company's taxable profits.

If you're a director of a limited company and if you're taking a low salary, you can make pension contributions straight from your company to your own pension pot too. This is a tax-efficient way to get money from your company while providing you with money which you can retire on. In this article, our small business accountants aim to explain how pension contributions can help your company and also you, the director of a limited company.

If you're a director of a limited company and you take salaries

In this scenario, assuming you're a director and also a salaried employee of a limited company in England, you may get tax relief on your pension contributions worth up to 100% of your annual earnings.

Here's an example: you and your company pay into your pension (maximum £40,000 a year), your pension provider then claims basic rate tax relief of 20% on the contributions you pay up to 100% of your annual earnings. In other words, you pay in £80, tax relief adds £20, so £100 goes into your pension.

If you're a director of a limited company and you take salaries and dividends

Many small business owners take a low salary and top up the income with dividends from profits. If you are in this scenario, the amount of pension tax relief you receive is limited to your salary earnings only as dividends are not considered as 'relevant UK earnings'.

But as a director of a limited company, you can make pension contributions straight from your company's pre-taxed income which helps your retirement and also being tax efficient.

The reasons many directors prefer this tax-efficient approach is because pension contributions in this instance may be considered as an allowable business expense if they are 'wholly and exclusively' for the purposes of business and they could save you corporate tax. In addition, the company also does not have to pay tax and National Insurance on the amounts it contributes to the pension pot as long as the figures are below the annual allowance which could range from anywhere between £10,000 and £40,000 per annum excluding any roll forward allowances. As the circumstances of each person are different from others, it is best to give one of our small business accountants a call on 020 8108 0090 for personalised advice.

The rules surrounding company pension contributions

While pension contributions made via your limited company are tax efficient, there are rules to follow.

Annual allowance

Beware that the annual allowance is £40,000 a year, unless you have earned sufficient income to trigger the pension tapering which could reduce the annual allowance down to £10,000. Anti-pension recycling rules can also reduce this annual allowance to a lower amount of £4,000 per annum.

In some instances, you may be able to pay over £40,000 a year if you have registered with a pension scheme but haven't used the £40,000 annual allowance in the previous three years.

Lifetime allowance

You need to pay tax if your pension pots are worth more than the lifetime allowance. At present (2020/21), the lifetime allowance amount is £1,073,100.

What counts towards your lifetime allowance can get complicated quickly as it depends on the type of pension pot you get, whether it is defined contribution or defined benefit. This is where a licensed pension advisor can help. Look for one who is regulated by the Financial Conduct Authority (FCA) and has extensive experience in pension planning.

Amount invested

Technically you can invest as much as you like into a pension, but the amount should not exceed your company's income for the year. Also, if the amounts are 'excessive' for the value of work you undertake, they may prompt HMRC to ask questions.

Get professional advice

While our small business accountants can certainly help you become efficient from a tax perspective, chances are you need a qualified pension advisor to help you choose a pension scheme that best suits you, since there are several available. For the purpose of this article, we will highlight three popular schemes.

Self-invested personal pension

A self-invested personal pension (SIPP) is a flexible and portable personal pension scheme allowing you to invest in a wide range of assets. Some SIPPs can even get a mortgage to part-fund the purchase of a rental property and use the rental income to service the mortgage repayments as well as the costs of running the property.

Small self-administered pension scheme

A small self-administered pension scheme (SSAS) is often taken by company directors and senior staff. The main benefit of an SSAS is that it offers increased flexibility on where the scheme's assets can be invested. For instance, it can purchase the building the company occupies and lease it back to the company. An SSAS can also borrow money for investment purposes if the terms allow.

Multi-employer pension scheme

Many companies have now implemented a multi-employer pension scheme, which is essentially an umbrella term referring to workplace pension schemes that are accessed by different employers and their employees. NEST, the workplace pension trust set up by the government, is an example of a multi-employer pension scheme.

Pensions and tax are complex subjects

Pensions and tax are complex subjects. How much tax benefits you can get from company pension contributions depend on your individual circumstances and the latest tax rules. This is why we encourage small business owners to speak to one of our chartered accountants first. In addition, having a chat with a qualified pension advisor can also help you to choose the best pension package.

At Tax Agility, we have dedicated small business accountants based in PutneyRichmond and Central London. Everyone in our team understands that business owners and company directors work relentlessly to achieve their dreams, which is why we are keen to help you keep your hard-earned money by becoming tax efficient.

As we are ICAEW chartered accountants, you know that you can rely on us to give you honest answers and provide services with no hidden charges. In other words, you're in good hands with us working alongside you.

This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.

 

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Pension scheme

Limited Company Pensions: How to use pensions to the full effect

Limited Company Pensions and SSAS

If you own a limited company, Tax Agility can assist you in implementing an Occupational Pension Scheme, such as a Small Self Administered Scheme (SSAS), in your business. Setting up a SSAS has the following advantages:

1. The SSAS is a trust that acts as a separate legal entity from your limited company, which means that it can give you additional creditor protection in the event of your company becoming liquidated. In order to administer this pension scheme, you must become a trustee of the SSAS, together with a professional trustee, as required by the Pension Act legislation.

2. You can make tax-deductible contributions from your limited company to your SSAS to a maximum of £50,000 each year for every director who is linked to the SSAS.

3. Any assets you purchase within the SSAS will grow in a capital gains and income tax free environment.

4. You can convert any previous pensions held in a Self-Invested Personal Pension scheme (SIPP), or through a commercial pension provider, into a SSAS. This will bolster your capital within the SSAS and enable you to purchase assets within the SIPP.

5. The SSAS can be set up to receive private contributions from individuals receiving the 20% uplift from the government.

6. If required, you may loan back up to 50% of the value of the assets in your SSAS to your limited company on a secured commercial arm’s length basis.

7. The SSAS can acquire intellectual property, or any other fixed property, from your limited company, paying you in cash for the assets. This can provide liquidity to your business and protect the assets in the event of liquidation.

8. On retirement, you may take a tax-free 25% cash lump sum of the benefits in the SSAS. The remaining balance of the funds is taxed and may be drawn as an annuity.

At Tax Agility we can assist you to implement a SSAS structure to achieve the above benefits and unlock your shareholder value in your limited company.

For more information on how we can help you to set up your own SSAS pension scheme, or if you have any questions about what pension scheme is perfect for your limited company, call us today on 020 8108 0090.


Summary of the Pension Reforms

TaxAgility Accountants London_PensionPension reforms finally came into effect on 6 April, but what do these changes look like, and what will this mean for pension holders going forward?

The reforms touched upon a number of areas, the most significant of which we’ve summarised below. For a personalised take on how the pension reforms affect your retirement future, speak with a qualified accountant.

Complete Access to Pension Pots

The main changes coming out of the pension reforms were first announced over twelve months ago at Budget 2014, with many of them focusing on giving pension holders greater freedom over their pension pots in terms of how they save, spend, or invest their pension going forward.

This was epitomised in the Government giving pension holders complete access to their entire pension pot from age fifty-five (with pension holders over fifty-five receiving immediate access on 6 April), without needing to buy an annuity. The new laws brought in with the pensions reforms allow pension holders to make withdrawals from their pension pot whenever they wish, with 25 percent of their withdrawal being tax-free on each occasion. Prior to these reforms, pension holders could only make one withdrawal with the 25 percent tax-free benefit.

Pension Pot Inheritance Tax Scrapped

On 6 April the so-called 55 percent ‘death tax’ on pension pots being handed down to loved one’s when the owner passes away was scrapped, with benefitting loved one’s now only having to pay tax on the pot at their income tax level.

In the unfortunate case that the owner of a pension pot dies before the age of seventy-five, the individual(s) inheriting their pension won’t be required to pay tax upon receiving the pension pot.

Great Investment Opportunities

There have been arguments on both sides of the political divide surrounding whether allowing pension holders greater freedom over their pension pot is a wise decision in the long run.

There’s certainly something to think about on both sides of the argument, with some financial analysts suggesting that many pension holders looking to immediately take out a portion of their pension upon turning fifty-five may not be aware that in doing so they may push themselves into a higher tax bracket. For the most part, however, being given greater freedom over how (and when) you can save, invest, and withdraw your pension will provide many pension holders and their accountants with a lot to think about with regard to how to maximise their future returns.

For this very reason, Chancellor of the Exchequer George Osborne made it clear ahead of the pension reforms coming into effect on 6 April that pension holders should take their financial future into their own hands; seeking out advice where appropriate to ensure all financial decisions are well thought through ahead of their implementation.

Experienced Accountants

To speak with a professional to discuss what the pension reforms mean for your financial future, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no-obligation meeting.


The Changing Tax Treatment of Defined Contribution Pensions

Pension_TaxAgility Accountants LondonDuring the Budget Chancellor of the Exchequer George Osborne laid out plans to “completely change the tax treatment of defined contribution pensions to bring it into line with the modern world,” by legislating to remove the remaining restrictions on how and when pensioners can access their savings.

Speaking on these new measures, Mr Osborne — who claimed that over thirteen million people across the UK have defined contribution schemes — said that these measures would amount to a radical change, though they’re just a small step in the direction of a fundamental reform of the taxation of defined contribution pensions. The Chancellor was quick, however, in pointing out that these changes will not apply for defined benefit pensions, though there will be consequential implications on which the government will consult shortly.

Rejecting what he called a “patronising view that pensioners can’t be trusted with their own pension pots,” the Chancellor insisted that individuals who have worked hard and saved hard all their lives should be trusted with their own finances by default.

Proposing what he claimed to be “the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921,” George Osborne introduced the following changes during Budget 2014, all of which took effect on 27 March 2014:

It’s No Longer a Requirement to Purchase an Annuity

The new measures (outlined below) make it no longer a requirement to purchase an annuity, a point the Chancellor was quick to stress several times during his speech. If you’re still attracted to the certainty of an annuity, the ability to shop around for the best available deal will be made available to you via…

Free, Impartial, Face-to-Face Advice

When you retire on defined contribution pensions you will, by law, be offered free, impartial, face-to-face advice on how to get the most from the choices you have at this time, with the Chancellor pledging to provide £20 million over the next couple of years to develop this advice offering.

Guaranteed Income for Accessing Flexible Drawdown Reduced

Reducing from £20,000 to £12,000 per annum, the amount of guaranteed income needed in retirement in order to access flexible drawdown has been almost halved.

Maximum Withdrawals Increased to 150% of an Equivalent Annuity

The maximum amount of money that can be taken out under a capped drawdown arrangement has been increased from 120 percent of an equivalent annuity to 150 percent.

Lump Sum Pension Pot Withdrawals Increased Five-Fold

Prior to 27 March 2014, pension pots of less than £2,000 could be taken as a lump sum. Now, this lump sum withdrawal limit has been increased five-fold to £10,000, while the number of pension pots any individual can access as a lump sum has been upped from two to three.

Total Lump Sum Withdrawals Increase to £30,000

To correlate with the number of pension pots you can access as a lump sum increasing from two to three, the total figure of pension savings you can take out as a lump sum has been increased from £18,000 to £30,000.

Dedicated Advice on Defined Contribution Pensions

To speak with a dedicated professional to discuss the new tax treatment of defined contribution pensions, and what it means for your savings, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

 

This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.


The New Pensioner Bond Explained

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The new Pensioner Bond has been designed to help out the many pensioners across the country who have seen their incomes fall dramatically as an unintended consequence of the continued low-interest rates enforced over the last few years, in a bid to support the economy.

Though Chancellor of the Exchequer George Osborne noted that the new Pensioner Bond will pay market-leading rates, the exact figures are to be set in the autumn in order to ensure they can secure the best possible rates for pensioners who wish to participate; though Mr Osborne noted during the earlier Budget 2014 that “…our assumption is 2.8% for a one year bond and 4% on a three-year bond — that’s much better than anything equivalent in the market today.”
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What is a SIPP?  SIPPs Explained

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Designed to make saving for retirement that little bit easier; you may invest 100% of your net earnings up to £50,000 into a SIPP in the current tax year (2013/14), with the government offering tax relief on every contribution (see below). As is true among all investments of this nature, the more you put into a SIPP, and the longer you keep it in there; the more compound interest you will build up over time.
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Pension Fees Cap Delayed Until 2015

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What is Fixed Protection?

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What The New Flat Rate State Pension Means for You

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