Directors Pensions

Directors Pensions

Directors’ pensions are not just about saving for the future, they are also a way to extract business profits tax-efficiently and depending on which type of pension vehicle is used, for example a Self-Invested Personal Pension (SIPP) for Small Self-Administered Scheme (SSAS), the pension can invest in business assets and even makes loans back to the company.

On top of all that, contributions paid by the business in to the Director’s pension scheme are a fully deductible business expense and so qualify for corporation tax-relief and personal contributions qualify for income tax-relief.

Why do I need a Director’s pension, surely my business is my pension?

Pensions for company directors are much more tax-efficient than putting savings into a bank or building society account or even an ISA. Once the money has been invested in a pension it is also protected from creditors. Directors’ pensions are normally funded by company contributions only, but non-business owning directors can make personal contributions that will qualify for tax-relief at their highest marginal rate. However, if personal contributions are going to be paid in by a director the most tax-efficient way of doing that is through ‘salary exchange’ where the personal contributions are taken from gross earnings by reducing the directors salary in lieu of increased pension employer contributions thus effectively benefitting from higher rate income tax relief at source and achieving savings on national insurance contributions for both the director and the company as his employer.

Add to this the investment flexibility that a director’s pension can provide and in certain circumstances the ability to make commercial loans back to the company, directors’ pensions can double up as a very useful business planning tool.

What if I need my money now?

Since April 2015, and if you are aged at least 55, new legislation commonly referred to as “Pensions Freedom” allows more flexibility on how your pension fund can be accessed. However, one has to be careful of the tax consequences as normally only 25% of a pension fund can be taken tax-free and anything taken above that is taxed as income at one’s highest marginal rate but unlike earned income, without being subject to National Insurance Contributions (NICs).

Things to consider:

  • HMRC limits – the annual allowance for contributions is £40,000 and subject to earnings, and unused annual allowances can be carried forward from the previous 2 years. However, higher earners may have their annual contribution limit reduced to as low as just £10,000 per annum for someone earning £210,000 per annum.
  • HMRC limits – The lifetime allowance for a pension fund has also been reduced to £1 million since 6th April 2016 having previously been as high as £1.8m in 2011. Unless pension protection has previously been applied for in respect of larger funds, any pension savings in excess of this limit will be subject to a lifetime allowance tax charge. If it is taken as a lump sum it is 55% and if it is taken as a pension it is 25%.
  • Legislation – The rates and limits on pension tax-relief are set by government legislation. As with all legislation, these are subject to change in the future.
  • Values – The investments held within a pension can fluctuate in value and are not guaranteed, neither are the benefits as retirement which will be affected by economic circumstances.
  • Registration – The pension scheme must be registered with HMRC in order to benefit from tax relief.

In a nutshell:

  • Saving for a comfortable retirement is an important part of financial planning, so do it as tax-efficiently as possible.
  • Director’s pension contributions are one of the most tax efficient ways of saving money for the future because if they are being paid by the business they qualify for corporation tax-relief and if the director pays in personal contributions, he will qualify for tax-relief at his or her highest marginal rate.
  • There are SIPPs and SSASs that have many other attractive features that can benefit a business owner and his business that a normal personal pension scheme is not capable of offering.
  • You can access your pension from the age of 55 and there are a number of different and flexible options available, including draw down.

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