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- We will call you back to find out more about your aims and requirements
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Who we work with:
- Individuals with £250,000 or more in investable assets. This includes pensions, ISAs, other tax-wrappers and cash available for investment.
Entrepreneurs typically use their business structures to access income tax-efficiently. The most common approach is to take a salary of £11,980 a year and then take the remainder as dividends. That precise level of income has the advantage of being above the ‘lower earnings limit’ and below something known as the ‘primary threshold’ for National Insurance. Essentially, what this means is that you can receive all the benefits of National Insurance without having to pay it. The amount is also under the £12,570 personal allowance, so doesn’t attract income tax either. The remainder of the entrepreneur’s income (taken as dividends) then benefits from a reduced basic tax rate of 8.75% and a reduced higher rate tax of 33.75%. There’s also an annual £2,000 dividend allowance available to further reduce the tax they pay.
For some reason, many business owners then conclude that as their salaried income is under the personal allowance, contributing to a pension just isn’t worthwhile. This couldn’t be further from the truth. If you’re a business owner with a limited company, pensions are fantastic tools for extracting cash from your business in an unbelievably tax-efficient way.
The annual allowance
First, we need to cover something called the annual allowance, to help you understand how much you can put into your company pension every year.
For the majority of people, the annual allowance is currently £40,000. If you earn less than £40,000, the maximum amount of personal pension contributions you can make is the same as your total relevant UK earnings. If you go over this limit, HMRC will hit you with a charge at the end of the year to get back the tax relief you’ve received.
This is another reason that many business owners get confused, believing that they can only contribute £11,980 a year into their pension as this is often equal to their salaried income. Dividends are not considered ‘UK relevant earnings’ for personal pension contributions.
Using your limited company to make employer pension contributions:
When you have a limited company, you can opt to make contributions as an employer pension contribution from pre-tax company income, rather than making a personal pension contribution as an employee. This means that you’re able to pay the full £40,000 a year into your pension and receive the available tax relief.
The ability to make pension contributions in this way provides huge opportunity. If you’re a higher-rate tax payer, £1,000 of company profits taken as dividends would arrive in your bank account as a net payment of £536.63. Direct that into your pension instead and the full £1,000 will be paid into the pension. That’s the equivalent of an 86% return on your money, simply by clawing back the income and corporation tax. If you were to max out your available annual pension contribution, instead of taking dividends as income, over ten years, you’d be £185,350 richer before any investment return. Simply because of the tax relief provided by the pension.
The wholly and exclusively test - saving up to 19% in corporation tax:
In order to make employer contributions in this way, you have to demonstrate to HMRC that they are ‘wholly and exclusively’ for the purpose of your business activity. This tends to be reasonably straightforward though as it primarily means ensuring that the pension contributions you make are ‘commercially reasonable’ for the work you are undertaking for your company. You’ll also need to demonstrate that they aren’t excessively out of kilter with pension contributions you are making for others in the business, if they are carrying out work of a similar value to you.
As your pension contributions are deemed as being exclusively for your business trade, they can be classified as an allowable business expense. As I touched upon in my example, currently your company will pay corporation tax on profits at a rate of 19%. Any cost that your company incurs for the running of the business can be deducted from the company’s profits before tax. This includes pension contributions. So, not only will you receive income tax relief on your pension contributions, but you’ll also save the corporation tax as well.
Inheritance tax benefits of a pension:
The final ‘slam dunk’ for your pension is the inheritance tax benefits. As well as making you wealthier through tax relief, your pension provides a superb generational planning vehicle. Many business owners, perhaps inadvisedly, hang their entire retirement plan on the sale of their business. Whilst every business owner passionately believes they will sell their business for multi-millions one day, you only have to look at the statistics to understand that this may not be realistic. Having a ‘plan B’ pension plan might not be a bad idea. If you are still convinced a sale is on the cards though, building up your pension still has exceptional value. A typical objective for sale proceeds is ensuring that your family is well looked after. If you have diligently built up your pension over time, this pot can effectively become a trust for your beneficiaries but without any of the administrative hassle or punitive tax rates of normal trust vehicles. You could potentially live off your sale proceeds whilst your pension passes completely free of inheritance tax to your children. You won’t be able to place a significant amount of money into your pension post-sale though, so it’s something that needs to be achieved over time whilst you are growing your business.
Why wouldn’t you contribute to your pension via your company?
The correct question to ask is not ‘why you should contribute to your pension via your company’ but rather, ‘Why wouldn’t you?’. The benefits are simply unbelievable. So, if you aren’t making the most of your pension, maybe it’s time for a re-think and time to take some advice.
All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.
Saltus Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested. Tax rules may change and the value of tax reliefs depends on your individual circumstances.
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Financial planning can help you reach your goals in life, whether you want to determine when you can retire comfortably, bring organisation to your financial world or pass on your wealth effectively.
Pensions and retirement planning
Deciding when to retire is a challenging decision and can feel like a leap of faith. At Saltus, we gather information on all of your existing assets and then use our technology and expertise to show you exactly how to achieve the retirement you’re after.
Reducing your tax burden
How to structure your wealth and access income should be approached in a sophisticated way. A detailed financial plan may use pensions, ISAs, general investment accounts, offshore bonds and other tax wrappers to ensure you can draw your money in a tax-efficient manner.
Consolidating your wealth
Holding multiple investment accounts and pensions can mean they’re hard to keep track of and administer. We’ll help you overcome this by consolidating your accounts into a single plan so that you can understand your financial position with ease.
Protecting you and your assets
We protect our cars and houses without much thought yet you might be the most valuable asset in your family. Whatever your situation, we can provide advice to ensure you have the right level of insurance in place to keep your finances protected.
Passing on your wealth
Estate planning is more important than just having a Will. We’ll work closely with you to understand how estate planning, which has emotional as well as financial consequences, can impact your overall financial plan.
Significant life events
Significant life events can present great opportunities but also considerable challenges. Whether you are going through a business sale, divorce or are receiving a lump sum, we’ll help build a financial plan to meet your changing lifestyle.