Tax efficient remuneration: pensions and planning your future

Tax efficient remuneration: pensions and planning your future

As an owner of a limited company, it’s easy to get caught up in facing current challenges and ensuring business growth. However, it’s equally important to have a forward looking perspective. Pension considerations should form part of your overall tax efficient remuneration planning.

Pensions are not always popular with business owners as the money cannot be accessed until retirement. However, you may be missing out on significant tax benefits that could make a big difference to the amount of money you can save for the future. 

Understanding the thresholds

Although there is no limit on the amount you can put into your pension, there is a limit on what you can contribute annually and receive tax relief on. This is currently £40,000 gross and is known as the annual allowance.

If you don’t use your full annual allowance, you can carry it forward for up to three years. There is a requirement that you must have been a member of a pension scheme in any particular year for which you wish to carry forward.

Care is needed if you are a high earner as you may only be entitled to a reduced annual allowance.  This is due to tapering rules which kick in where a person’s income exceeds £200,000 and can reduce your annual allowance down to as low as £4,000.

Personal contributions 

Contributions can either be made personally or via your limited company. With personal pension contributions you only pay an amount that is net of basic rate tax as the government tops up your fund with the tax element. This means if you want to put £100 into your pension fund, you just pay £80, and the government contributes £20.

If you are a higher rate taxpayer, there are bigger benefits. The pension company claims back an amount equal to basic rate tax on the pension contribution but as a higher rate taxpayer, you can also claim an additional 20% tax relief against your tax liability.

A downside of personal pension contributions is that you only get tax relief on contributions equal to your Net Relevant Earnings.

Net Relevant Earnings include salary but not dividends, therefore business owners who take a small salary and large dividends will have a low pension relief limit. To make larger pension contributions you could take a bigger salary or make the contribution straight from your company as an employer contribution.

Employer contributions 

An employer contribution has two main benefits; the first is that there’s no employers or employees’ national insurance to pay on the contribution. The second is that an employer contribution is not limited to your net relevant earnings.

In addition, the company can usually offset the pension contribution against its taxable profits and the contribution should not be regarded as taxable income provided annual allowance limits aren’t breached.   Employer contributions are therefore a very tax efficient way of extracting profits from your company and providing for your retirement.

Get in touch 

Retirement planning is a journey. And, just like with any journey, there’s more than one way to get there which means seeking advice is key. It’s important to build a plan that you’re happy with and can regularly review to ensure it stays on track.

Tax efficient pension planning is just one of the areas we advise on to help Hull-based businesses and their owners structure their affairs to minimise tax and make the most of their finances. If you would like to chat about your options, get in touch today.