Company pension contributions
In this week’s Money Matters – Ask the Experts column, Arthur Millman from Goldwyns Accountants, based in Southend, FCA, a director at the company, offers pensions guidance for the Directors of a successful business.
Dear Goldwyns, I have been running my own business through a limited company for a number of years. I take a salary and dividends from the company, as indeed does my wife. I have no desire at present to take extra income from the company above what I take due to us both being on the threshold of higher rate tax, plus the new dividend rate of tax is beginning to bite. Fortunately, our company is making profits over and above our requirements. Any ideas?
Arthur Millman writes -
I am pleased to hear that your business is successful. It is however only one “slice” of your financial affairs; other “slices” will include your home, any other property, investments and, in my opinion, should also include retirement provision. Unfortunately even some high earners make little or no provision for their retirement in the false assumption that they will be well provided for by the State.
Whilst your business is making excellent profits, it makes perfect sense to set up a company pension scheme for you both. In effect, you are taking income which would otherwise be taxed at higher rates, investing that money in a tax free environment and receiving it [as a pension] at a time when you are likely to be a basic rate taxpayer. In addition, a quarter of your pension fund at retirement can be drawn as a tax-free lump sum. It can also be an effective way to pass on part of your wealth to your successors free of inheritance tax.
There are restrictions to the level of contributions [£40000 p.a.], but any unused relief for the three previous years can be used. There is also a lifetime limit on your pension fund which was at one time £1.8 million, but has steadily been reduced to £1 million. These limits apply to each person. It is also sensible that your accountant liaises not only with you, but also with your independent financial adviser so that you are all “singing from the same song-sheet”.
This article first appeared in the Southend Echo on 9 January 2018.