Pensions for Self-employed and Business owners

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Pension plans in the UK are arguably one of the most tax efficient savings methods for UK citizens. Any contributions that you make to your pension receive tax relief, the growth within a pension is not subject to capital gains tax and the whole amount saved is kept out with your estate for inheritance tax purposes.

Furthermore, pension savings also have valuable death benefits for your loved ones. Research has shown a clear disparity between pension savings for employed people and self-employed people.

Pensions for self-employed and business owners can make for a potent, tax-efficient tool

Private pension wealth for employees and the self-employed for those aged between 35 and 54 (July 2014 to June 2016, GB)

The graph above shows that an astonishing 45% of self employed people aged between 35 and 54 had no private pension provision compared with approximately 16% of employed people in the same age bracket.

Why have so many self-employed people not taken advantage of the tax benefits of a pension? One answer could be that the many self-employed people see their business as their retirement fund, and are perhaps unaware or unappreciative of the tax benefits of pension funding.

The problems with this theory however are many. What if the value of your business isn’t as much as you’d hoped for, when it comes time to sell? Or perhaps the business will take longer to sell than you would like?

Pension funding as a self-employed person is just as important as for anyone else. Under current legislation, a business can fund a private pension for its director(s)/ employees by up to £40,000 per annum and receive tax relief on this. The Corporation tax rate for the current tax year (2020/2021) is 19%. Any pension contribution the company pays reduces the taxable profit and therefore a reduction in corporation tax liability. In other words, every £100 paid into an employee’s pension costs the company £81.

Pension Annual Allowance

The annual pension funding limit is known as the Annual Allowance (AA). Any Annual Allowance limit unused in the previous 3 tax years can be used up in the current tax year, which is known as the carry forward rule. This is of particular use in a year where the company has made a larger profit than in previous years.

Investment Options & Commercial Property within a pension

Furthermore, the investment options within a pension are vast but include the ability to purchase a commercial property and also to borrow against up to 50% of the pension’s assets. Many business owners use this option to purchase the company’s work space. Not many commercial properties are off limits so it is useful across most industries to purchase offices, bar and restaurants, GP and dental surgeries and even land to then build upon.

As the value of the property increases over time, so too does the value of your pension and therefore your potential retirement benefits.

Self-invested pension plans such as a Self Invested Personal Pensions (SIPP), Group SIPPs or a Small Self-Administered Scheme (SSAS) may invest some or all of the scheme’s assets into land or ‘bricks and mortar’ commercial property such as nursing homes, public houses, agricultural land and property, industrial, commercial or retail units. In addition, the schemes may also borrow within certain parameters to meet the costs of the purchase.

This way of holding property can have advantages of growth outwith the capital gains tax regime as well as providing a way to genuinely diversify retirement investments while attracting capital growth of the subject assets and tax efficient income payments from the rental they attract (which may also be a deductable expense for business owners).

We have heard all sorts of wonderful tales of the property that some investors would like to hold in their portfolios. Run your situation past us and we will let you know where we can help.

Contact us for an initial consultation with one of our advisers to discuss tax benefits of pension funding and retirement planning tailored to your individual circumstances.

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For more information on Pensions:

* Source for Private pension above for self-employed and employees, as above: employmentandlabourmarket/…