A lot of clients do not realise that HMRC do not create the tax laws. Parliament lays down the law in thousands of pages of tax legislation, written in a version of English only known to the people who write them and Tax experts.
HMRC then interpret that legislation and write guides on their websites both for their staff and for the general public to read. On the whole these guides are very useful, accurate and balanced. However there is the occasion where the guidance on the website or actions by HMRC do not follow the letter of the law. It is obviously in their interests to levy penalties, increase the tax owed and sometimes they encourage people to comply somewhat over enthusiastically.
This is where a professional Tax Adviser comes in. We can refer back to the source legislation and argue the case with HMRC. This often has the effect of changing their minds and if it doesn’t we can appeal the case to a tribunal who will take a balanced view of the case.
So if you feel you are being harshly treated by HMRC please get in touch and we will see if there are any grounds for dispute.
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.
We speak to a lot of small business owners and the suggestion of pension contributions is often derided. However recent changes to the tax treatment of private pension contributions make pension contributions an essential tool in the armoury of getting money out of a small business.
In the past the perception was that pension contributions were tax efficient at the time you made them but there were a number of downsides:
- The charges on the pension while it was invested were very high.
- When retirement age was reached there was no flexibility. You bought an annuity which gave you a low return, and then if you died early your children got nothing.
- You were locking your money up forever so if you sold your business and wanted to buy a dream house or boat your pension wouldn’t help.
Continue reading “Why Pension Contributions are a no brainer for a Small Business Owner”