Personal finance
wners of small businesses are occasionally unconvinced by the merits of pensions. ‘My business is my pension’ is a
common refrain but is it a sensible financial planning strategy? There are, of course, a number of advantages to re-investing company profits to grow a business, particularly where you can see significant growth potential. The sense of excitement and control over your own destiny are also powerful drivers. But in order to realise the value in your business, and ultimately retire, a suitable buyer will need to be found who is both willing and able to pay the right price, and at the right time. That isn’t always easy.
by Ian Thomas CFPCM Director, Pilot FINANCIAL PLANNING.
MY BUSINESS IS MY PENSION O
However, under new rules announced in this year’s budget, after this point you have free access, with 25% of any withdrawal being tax free and the remainder being subject to your marginal rate of income tax at that time. It may be possible, through careful planning, to utilise the £10,000 income tax personal allowance and basic rate tax band to receive up to £36,000 of the initial £40,000 profit as a personal net benefit. Pensions can also be highly flexible in terms of investment. SIPP and SSAS (Small Self-Administered Schemes) can normally invest in land and commercial property, including your own business premises. Paying rent from your business to your own
Bonus (Salary) Gross Profit Pension Contribution Corporation Tax Net Dividend Employer NI Gross Payment to Director Income Tax Immediate Net Benefit to Director Subsequent Income Tax on Pension Withdrawal Final Net Benefit to Director £40,000 £0 n/a n/a (£4,851) £35,149 (£14,060) £21,089 n/a £21,089 Dividend £40,000 £0 (£8,000) £32,000 n/a (£8,000) n/a £24,000 n/a £24,000 Pension Contribution £40,000 £40,000 NIl n/a n/a n/a n/a £40,000 £4,000 £36,000
The figures in the table are based on a company that has £40,000 gross profit (not the individual’s salary) that it wishes to apply for the benefit of one of its directors. The company is assumed to pay corporation tax at 20% and the Director income tax at 40%. On withdrawal of the pension funds, the Director is assumed to have no other taxable income.
Furthermore, if anything were to go wrong with your business,
for whatever reason, you could end up losing everything, including your hard-earned, comfortable retirement. So, how might pensions help? The table below compares the net personal benefit of a £40,000 profit to a controlling director of a small limited company. It compares three different forms of remuneration: a bonus, a dividend payment and a pension contribution. Pension funds cannot be accessed until age 55 at the earliest.
pension fund is a commonly-used strategy. SIPP and SSAS can also borrow up to 50% of the fund value for a commercial purpose and SSAS can even make loans to, and purchase shares in, a connected employer. In summary, pensions can now offer a very efficient way to extract company profits. They can also be an excellent business tool and an alternative source of finance. Most importantly they can diversify the risk of having all your eggs in your business basket.
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
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