Pensions for business owners
Saving for your pension is an important and prudent step to take whatever your livelihood. If you are a business owner, it is equally imperative, but you have more options to maximise the value of your pension pot by taking advantage of the tax allowances available.
Pension contributions for the self-employed
As a business owner, you are effectively self-employed and may opt to pay into a personal private pension scheme.
As a self-employed taxpayer at the basic rate, you pay 20% in income tax and a further deduction for National Insurance contributions. After the basic personal allowance of £11,850 (rising to £12,500 with effect from April 2019), for every additional £1,000 you earn, therefore, you retain £680 of your income.
You may use your retained income to contribute to a personal pension scheme and qualify for a 20% tax allowance on the contributions you make (up to a maximum of your annual income). The same 20% allowance is available if you pay income tax at the higher rate of 40% but rises to a 25% allowance if you are paying tax at 45% of your income. There is no rebate on the National Insurance contributions you have paid.
Employer contributions pensions
An alternative – potentially more advantageous – arrangement is to arrange your pension savings on the basis of employer contributions from your business.
In that case, part of the salary you might otherwise have withdrawn from your business may be paid by way of employer contributions to a pension scheme. The advantage is that the whole of every £1,000 paid in this way is free of tax and there are no National Insurance contributions to pay.
Since the savings on National Insurance contributions might also be counted into the employer contributions that are made, this makes a potential total employer contribution to your pension of £1,138.
Individuals and employers may usually pay up to a maximum of £40,000 a year into a pension scheme, but it is also possible to carry over unused amounts of that total allowance from one year to the next (up to a maximum of three years) – as described on the official website.
There are exceptions to these rules, however, especially if your income is more than £150,000 a year, when the maximum tax-free allowance on pension contributions may be reduced.
In other words, the tax implications of employer contribution pension schemes may be as complicated and involved as many other tax issues – and independent advice may be needed to strike the most tax efficient way of saving for your pension.
Independent Pension Specialists
To ensure that you are making the most of your pension arrangements and maximising the eventual pension pot on which you rely in your retirement, you might want to consider the range of services offered by us here at Independent Pension Specialists.
Our services cover the full range of your likely pension needs, and it is possible to mix and match those most likely to suit your particular requirements and circumstances.
Any data and information cited in this article is accurate at the time of writing