The right pension plan can be an invaluable source of help in the current troubled times and it can also provide assistance in overcoming some of the potential new hazards on the horizon:
* Loss of personal allowance for those with income £100,000+.
* New 45% tax banding (37.5% dividends) for individuals with an income of £150,000+.
* Increase of 0.5% on employer and employee National Insurance (NI).
* Increase in small companies’ corporation tax rate to 22%.
* Income shifting legislation (postponed but not forgotten).
However, to access the full potential of a pension we should really be looking at, and talking about, self-invested pensions, that is self-invested personal pensions (SIPP) and small self-administered schemes (SSAS).
A quick reminder of a few of the ways that a pension can help.
Employer pension contributions
A pension contribution meeting the ‘wholly and exclusively’ rules will:
* Be deductible from profits for corporation tax, so will reduce the company’s tax bill.
* Not be a taxable benefit, so no tax or NI on the employee.
* Provide protection from creditors.
* Provide for future financial security.
Tax relief against corporation tax is granted in the tax year of payment. So timing can be a vital issue. With income tax and NI on the up, the attractiveness of salary sacrifice and also bonus sacrifice is increasing for business owners. A point to note is that the salary sacrifice contribution will be an allowable deduction under the ‘wholly and exclusively’ rules.
The Pre-Budget Report at the end of last year announced the extension of the ‘carry back’ facilities for corporation tax losses for up to three years. The amount of loss carried back one year is unlimited, but for the preceding two years there is an overall cap of £50,000. Through the payment of a pension contribution, it may be possible to create a loss that could be offset against profits of the previous three years.
Commercial property ownership
The question as to the best way to own commercial property should be revisited, especially since A-Day relaxed the rules on connected party transactions.
Does the business owner or the company have commercial property which, if sold to the pension scheme, could shelter it from future tax liabilities, but also provide an injection of much needed cash via the sale proceeds?
If the SIPP pot is not big enough then you could consider:
* Consolidating other pension benefits, including protected rights into it.
* Paying in additional contributions, possibly utilising pension input periods.
* Sharing ownership with other SIPP members.
* The SIP sharing ownership of the property with the member or the company.
* Borrowing. Remember a SIP can borrow up to 50% of its net asset value.
Consideration should be given to the usual tax implications of selling and buying an asset, and also the FSA requirements of any pension transfers.
Loans to company
It is probably fair to say that since A-Day there has been a move away from SSAS towards SIPP. However, a SSAS does have an advantage in that it is allowed to make a Loanback to a sponsoring employer. This facility could provide a valuable source of alternative finance for a business.
Post A-Day, Loanbacks should:
* Be limited to 50% of the net fund value.
* Not have a term longer than five years.
* Be secured as a first charge on assets equal to value of loan.
* Be repaid in equal annual instalments of capital and interest.
* Have an interest rate equal to an average of six leading banks’ base lending rates, rounded to the higher 0.25% plus 1%.
Taking this a stage further, it might be possible to utilise the annual investment allowance (AIA), which was introduced in April 2008, and effectively obtain tax relief twice. The AIA gives 100% tax relief on the first £50,000 of business expenditure on most plant and machinery, research and development, and business premises renovation.
Pensions have received some bad press over recent years. But maybe now is the time for business owners to examine the wider benefits, as well as the usual retirement income provision.
More information on Pensions Planning for business owners.