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Beyond Retirement Income – The Importance of Pensions for Business Owners

Gresham Wealth

Business owners may consider their business to be their pension plan, relying on its future sale, or perhaps the business premises, to deliver a lump sum for retirement. To this end, it’s not unusual for business owners to forego a pension themselves, even if the company has a pension scheme for its employees.

Alongside a successful and profitable business, pensions can be a fantastically flexible and a useful tool for extracting cash in a tax-efficient way.

Here are some of the reasons business owners should consider utilising a pension as part of their long-term financial planning.

For limited companies, pension contributions are an allowable business expense. Employer pension contributions are effectively unlimited, and as long as they meet the ‘wholly and exclusively’ test, they will qualify for corporation tax relief and can reduce this tax liability.

For sole traders or employees, any pension contributions made personally can also help to bring your relevant earnings under a particular level; therefore, releasing valuable allowances. For example, high earners with income over £100,000 are subject to a personal allowance reduction, meaning they lose their personal allowance gradually at a rate of £1 per £2 of excess income. For those with adjusted income over £260,000, there is also the tapering of the pension annual allowance and the maximum amount payable into a pension during the current tax year reduces from £60,000 to only £10,000.

The simplest way to negate these allowance reductions, and therefore incur a lower income tax liability, is to make a personal pension contribution. Done effectively, this can help to reclaim the personal tax allowance, with the added benefit of receiving tax relief on the amount paid into your pension.

Due to the options and flexibility a pension allows, business owners should consider registering a pension, even if contributions are not made straight away. Companies can experience growth that may lead to large amounts of excess cash that could be utilised more efficiently. Under the carry forward rules, anyone who registered a pension since 6 April 2020 could fully maximise contributions in the current tax year (2023/24), as well as the previous 3 tax years (2020/21, 2021/22, and 2022/23). Therefore, in the current tax year, £180,000 could be placed into a pension to fully maximise the carry forward allowance (subject to having the earnings). A newly registered pension doesn’t allow this flexibility and contributions can only be made to the current tax year’s maximum allowance. 

In addition to company and personal tax savings, pensions also have added benefits;

  • Tax-free fund growth within a pension wrapper as income and capital gains are not taxed.
  • At retirement, pensions can provide you with greater flexibility for extracting income.
  • Pensions allow you to invest in a variety of different assets and manage them yourself. This means that you can tailor your investments to your specific needs and goals.
  • Money in personal pensions usually falls outside of an estate for inheritance tax purposes. Therefore, by investing in a pension, it can be a great way of removing assets from your estate, whilst ensuring your money will be passed on to your family in the event of your death.

When it comes to your financial future, it pays to be proactive. As a business owner, there are many benefits to having a pension that can significantly impact your financial situation in both the short and long term. Contributing to a pension through your company can be a great way to save money on taxes, whilst building a pot of money (that is ring-fenced from company assets) for future use and ensuring the pension pot is passed on to beneficiaries, free of inheritance tax.

At Gresham Wealth Management, we work with business owners to ensure that they are making the most of contributions to pensions. Our advisers can help you understand the various options available to you and create a tailored plan that meets your specific needs and goals.

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