When you are busy building your business, it is easy to put your own finances to one side. Taking the time to create a clear plan that connects your business goals with your personal future can give you confidence that all your effort will pay off in the long run.
One of the most effective ways of ensuring you reap the rewards of your business’ success over the long-term is by re-directing your existing business revenue to a pension. As a small business owner, you have options when it comes to how you save for retirement and using your limited company to make pension contributions can bring both personal and business benefits.
Personal v Employer Contributions – does it matter?
Most people are limited to making personal contributions to their pension, however as a business owner you are able to take full control of making employer contributions too.
Personal contributions receive tax relief that reflects the rate of income tax you pay. This means that, as a basic rate taxpayer, you effectively only pay £1,000 to save £1,250 into your pension. This type of contribution is capped at the level of salary you receive, known as your ‘relevant UK earnings’.
For example, if you paid yourself a salary of £12,500 a year and take £35,000 in dividends, your personal pension contribution would be capped at £12,500 as dividends do not count towards your relevant UK earnings.
To increase the amount of money you can pay into your pension and still benefit tax relief, you can either:
- Increase your salary: this income may then become subject to income tax
- Make the pension contribution straight from your company as an employer contribution
Employer contributions come from pre-taxed company income and are paid gross to the pension. Should the contribution be ‘wholly and exclusively for the purposes of the business’ then the contribution can be allowable as a business expense.
The benefits to this approach are:
- A smaller tax bill for your business: contributions can be deducted from profits before they’re assessed for corporation tax (limited companies) or income tax (partnerships).
- High level of pension contributions: tax relievable contributions can be made up to the annual allowance of up to £60,000 per year meaning they are not subject to restrictions of your salary.
- Save employer national insurance: Employer national insurance contributions are not paid on pension contributions; by contributing directly into your pension rather than paying the equivalent in salary, you save up to 15%.
The sooner you start, the better
Taking just a few hours each year to review and plan your pension contributions can make a real difference to your financial future. By connecting your business with your personal retirement plans, you can ensure that the hard work you put into your company today pays off for you and your family in the years ahead.
If you are a small business owner looking to make the most of your pension options, please get in touch. Wingate Financial Planning are experienced in helping business owners connect their business wealth with a secure retirement future through tailored financial planning.
