Who is protecting your future – part 5

Who is protecting your future – part 5

What sort of pension do I need?

In this series of articles, we will try to explain your options and clear some of the minefield for you.

We are not pension advisors – we are accountants.  We do not sell pensions and have no vested interest, other than helping our clients protect themselves financially

Last week we diverted slightly as we come up to the tax year end and looked at tax planning measures to consider now.  The options include pensions and we now look at the two main choices if you are in business for yourself.

The main options are:

If you run your own business through a limited company, you can make personal contributions to your own personal pension, or you can make contributions through your company.

You need to consider and evaluate which is most tax efficient and what is the best structure for you because that varies from one person to another.

If you have a limited company, contributing to a pension can bring significant tax advantages. Pension contributions can be treated as an allowable business expense and offset against your company’s corporation tax bill.

Both options bring tax advantages, and what’s right for you will depend on your individual circumstances, but here is a brief summary of some of the tax implications for each option.

If you own or part own a limited company and take both salary and dividends because that saves National Insurance, be aware that the dividends do not count as relevant earnings for pension contribution purposes.  Only the amount of money you take as salary (plus other earnings you may have) will be used to calculate your pension contribution limit for tax purposes.

So if you take a small salary and a large dividend from your company, your pension tax relief limit will be low. If you exceed your limit, you will probably incur extra tax charges.

Therefore, if you want to increase the amount of money you can pay into your pension and still enjoy the tax benefits, you can either:

Your company, as your employer does not have to pay Employers NI on the contributions, saving 13.8%. That is comparing paying a salary to enable you to pay the contributions personally – out of taxed income.  Apart from the NI saving, there are other benefits to contributing this way too.

Your limited company contributes to your pension out of profits before tax. Because employer contributions count as allowable business expenses, your company receives tax relief against corporation tax, so the company could save up to 19% in Corporation Tax.

Depending on your circumstances, this may or may not be more beneficial to you than paying personal pension contributions.

If you are the director of a company you can also make employer contributions into your personal pension as well as personal contributions.

Particularly towards the 05 April tax year end you should consider your position carefully, think about making savings and how best to invest tax efficiently.  And always get specialist advice e.g from an IFA.

 

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Who is protecting your future – part 4

Who is protecting your future – part 4

How much can I invest in a pension In this series of articles, we will try to explain your options and clear some of the minefields for you. We are not pension advisors – we are accountants.  We do not sell pensions and have no vested interest, other than helping our clients protect themselves financially. — Read more