The Business Owner and a Company Pension

Posted by on May 3, 2015 in News Alerts, Newsletters | No Comments

As more and more individuals in the UK opt to work for themselves under the protection of a Limited Company, a frequent question is can the company provide a pension scheme?

The short answer is yes where the shareholder/Director is also an employee of the business.

Company contributions into the pension scheme are an allowable business expense so long as they satisfy the HMRC test that they are ‘wholly and exclusively’ for the benefit of the business. This rule is applied to all business expenses.

Unlike employee contributions to a pension scheme that are capped at the level of salary, there are no precise rules to limit to the employer’s contribution. Rather it has to be deemed proportionate.

In instances where the Director is the spearhead of the business and whose activity generates the company revenue, a compelling case can be made to justify a relatively large pension contribution in relation to their salary.

The annual allowance for contributions into an individual’s overall pension pot is currently £40,000.00 after which the individual would pay tax on additional savings. As a result, this serves as a de facto limit.

The other figure to be mindful of is the lifetime allowance which is currently £1.25 million. Again, the individual is subject to tax on amounts above this limit.

If you are enrolled in more than one pension scheme, it is important to keep track of the overall total across the schemes.

Assuming the company pays £40,000 into a pension scheme in a financial year, this would reduce the Corporation Tax liability by £8,000.

In terms of the pension scheme, there are a myriad of proprietary products which may be suitable.

As an accountancy firm, CooperFaure is not allowed to provide pension advice. Moreover, our ethos means that we do not endorse any product in return for a commission. However, we would be pleased to provide the contact details of pension advisors based on our clients’ feedback.

For the more entrepreneurial, an alternative is a Small Self-Administered Scheme (SSAS) that allows business owners to keep more control over the investment and administration of their pension funds.

A SSAS is still an occupational pension scheme but is established under trust by the sponsoring employer for the benefit of the scheme members who ought to be trustees. As such, it is outside the scope of the Financial Conduct Authority but is regulated by the Pensions Regulator.

The company would pay contributions into a separate bank account specifically for the SSAS and these funds are invested and grow with interest, dividends, rents and further contributions.

However, the SSAS can provide financial flexibility for a business. For example, the trustees are allowed to make a commercial loan back to the sponsoring employer or to purchase property to lease back to the sponsoring employer at the market rent.

Beyond the Corporation Tax relief, there are some attractive tax benefits:

  • any personal contributions by the trustees are eligible for individual tax relief in the year they are made.
  • with the exception of Dividend income, there is no Income Tax on the revenue that the investments generate.
  • the gains on the disposal of investments are not subject to Capital Gains Tax.

The level of company pension contributions and the manner in which they are invested should form part of the overall financial and tax strategy of the business owner.

If you would like any further information or to discuss your particular circumstances, please email welcome@cooperfaure.co.uk for an initial free consultation.