Pension Contributions in Practice

Following on from the blog article on the new more flexible tax rules on Private Pension Contribuitions here is how it will work in practice for a typical client. Remember we cannot give financial advice but can only advise on the tax advantages of pensions. The rules are extremely complex and Independent Finacial Advice should be taken.

Most of our clients run Limited Companies. So on the whole it is sensible to pay Company contributions to a private pension. This means the money goes straight from the Company to the pension provider as opposed to being paid to a person through their salary and then being paid over (a personal contribution).

The annual allowance (that is the total of Company and Personal contributions) is now £40,000 a year. So over a period of time business owners can put a substanmtial amount of money in to their pension.

The most compelling tax reason for doing this is to avoid paying higher rates of tax. If a business owner wants to extract more than £38,600 a year in salary and dividends they will start paying higher rate tax on the extra. If they need the cash then there is no easy option apart from paying the tax. If however they are happy to lock it up until age 55 then they can pay Company Contributions as described above. These will be deductible for Corporation Tax.

The new rules then mean that at age 55 or above these monies can be extracted (with 25% taken tax free) and the prevailing marginal rate of income tax will be charged. If a person has retired quite possibly they will now not be a higher rate tax payer and so will only be paying the standard rate of income tax (currently 20%) on this income.

There are obviously many permutations and combinations of all of the above. However if you are a business owner and dont need the cash now, rather than letting it build up in the Company serious thought should be applied to whether pension contributions are appropriate. With the new more flexible rules coming in more and more business owners will be takinbg this route.