Pension Planning for the Self-Employed and Owner-Directors
Governments of all persuasions recognise the economic importance and benefits of encouraging the self-employed and SMEs, allowing them greater freedom of action in order to generate wealth.
With this freedom also comes the responsibility to provide both for their staff and, ultimately, themselves. Pensions can be utilised in many ways towards this goal.
As well as self-employed individuals and partnerships trading under Schedule D, I also advise many business owners and directors of companies identified by HMRC as ‘Employed by their own company’ (Schedule E).
A pension can systematically extract the profits from your business in a tax efficient manner
Understandably, many business owners wish to use all their available funds to invest in their own enterprise and see the selling of their business interests as their pension plan.
But why leave everything to the eventual sale of your business interests in the future? Why not regularly set profits aside in a tax efficient and secure manner? I have never heard a successful businessman complain that they set too much aside in their pension when they take these benefits.
Instead of paying a large portion of your profits out in taxes, you can at least defer this liability through your pension(s), while utilising these gains to increase your funds before realising the benefits in a favourable manner at retirement.
Pensions can be utilised to remunerate staff in a tax efficient manner
Paying directly into a pension via your company can provide an additional director’s remuneration and enhance employee benefits in a tax and cost efficient manner.
Through employers’ pension contributions, you can save substantial national insurance liabilities, at present 12 per cent employee and 13.8 per cent employer’s.
Even if you currently take the majority of your profits through dividends, remember that these have already suffered corporation tax. For example, if you were to place £50,000 into your pension, instead of taking these monies as a dividend, this would save £10,000 of corporation tax at the small business rate and a further 25 per cent of your monies on dividend tax. If you own your company, by paying directly into a pension you would be at least 40 per cent better off. The savings are even greater if your company pays corporation tax at a higher rate. Similar savings can be made while remunerating important staff.
Pensions can be used to buy commercial property
If you and your fellow directors had sufficient monies in your pensions you may wish to consider purchasing your business property through using a Self-Invested Personal Pension policy (SIPP). Not only will you obtain tax relief on building up your initial purchase monies as outlined above, but you may also rent back your business premises from your pension scheme (which has purchased and owns it) through your business.
What are the benefits of this strategy?
You may simply wish to raise capital to purchase your business property and your accumulated pension funds may go some way to meeting this objective. Furthermore, you may be able to raise additional monies through a loan as banks consider these types of vehicles as safe propositions.
You can lease your business premises to your business. The rent you pay to your pension (which now owns your premises) will be a qualifying business expense liable to full tax relief. These are just some of the reasons why, for example, many solicitors and accountant practices purchase their business premises in this manner. If this approach is attractive enough for these professionals, then surely it is useful for your particular business?
Pensions offer added security
You may have enjoyed a number of good trading years only to fall into liquidation; pension funds built up over this period are out of reach of creditors.
In the event of a possible hostile takeover of the board, individual directors’ pensions are safe and cannot be acquiesced by the company.
Pensions can be used to pass on your legacy
You may own a family business and you may wish to keep the business in the family even after you have gone. A family self-invest personal pension and various other schemes can offer you many opportunities to pass on your family wealth in a tax efficient manner, while potentially ensuring this is not decimated by Inheritance Tax and other tax liabilities.
These are some of the many advantages to pensions and are key reasons why so many businesses, professional practices and entrepreneurs utilize these options as major strategies in their overall planning.
