The maximum pension contribution is £40k per year and if you haven’t used the allowance in previous years there is a 3 year carry forward of unused contributions.
Most business owners pay this as a company contribution, that should save corporation tax as its a tax deductible expense.
S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009
A pension contribution by an employer to a registered pension scheme in respect of any director or employee will be an allowable expense unless there is a non-trade purpose for the payment.
One situation where all or part of a contribution may not have been paid wholly and exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer. In this situation, you should consider whether the amount of the overall remuneration package, not simply the amount of the pension contribution, was paid wholly and exclusively for the purposes of the employer’s trade.
From April 2016 the number of qualifying years to get the full New State Pension has been 35 years, before that it was 30 years.
You can find out how many qualifying years you have by logging onto your government gateway
On the main page go to the bottom and click on ‘View your personal Tax Account’
Then go to the National Insurance box and click on ‘view gaps in your record’ you will then get the summary below and details for each year
You have:
xx years of full contributions
xx years to contribute before 5 April 20xx (retirement year)
xx year when you did not contribute enough
Eligibility – New State Pension
You’ll be able to claim the new State Pension if you’re:
a man born on or after 6 April 1951
a woman born on or after 6 April 1953
The earliest you can get the new State Pension is when you reach State Pension age.
Your National Insurance record
You’ll usually need at least 10 qualifying years on your National Insurance record to get any State Pension. They do not have to be 10 qualifying years in a row.
This means for 10 years at least one or more of the following applied to you:
When you’re working you pay National Insurance and get a qualifying year if:
you’re employed and earning over £183 a week from one employer
you’re self-employed and paying National Insurance contributions
You might not pay National Insurance contributions because you’re earning less than £183 a week. You may still get a qualifying year if you earn between £120 and £183 a week from one employer.
Gaps in your National Insurance record
You may get gaps in your record if you do not pay National Insurance or do not get National Insurance credits. This could be because you were:
employed but had low earnings
unemployed and were not claiming benefits
self-employed but did not pay contributions because of small profits
living abroad
Gaps can mean you will not have enough years of National Insurance contributions to get the full State Pension (sometimes called ‘qualifying years’).
You may be able to pay voluntary contributions to fill any gaps if you’re eligible.
Pensions are highly tax efficient and you can purchase Commercial Property, the main examples of types of property your pension could buy are
Industrial units
Offices and shops
Farmland and forestry
Public houses
Nursing homes
Hotels
Marine berth
The things you can’t buy are residential property, holiday property, caravans, beach huts, basically, if you can live in it then it will probably be difficult to put it your pension.
If your business owns its premises or you have mixed property investments where you can title split to separate the commercial from the residential it could well be worthwhile to move the commercial property into a pension scheme (SIPP or SSAS).
The tax benefits are:
When you or your business contribute to your pension scheme the contributions are tax free – for individuals they will will get back tax at 20% and can claim additional tax relief on their self assessment return, for companies they can save 20% corporation tax
When the property is in the pension scheme there isn’t any tax on the rental income or capital gains tax if you sell the property
When you retire you could get 25% of your pension tax free
Other benefits include:
Your business could use cash tied up in the premises to invest in trading activities or for other investments
Pensions are normally outside of the scope of inheritance tax
It will ring fence your property from your other activities
In summary to move your business premises from your business to a SIPP or SSAS pension you would do the following:
Find a lender prepared to lend a third of the property value to your pension scheme (which will be half the value of the fund ie if the property was valued at £300k, your pension could borrow £100k which is 50% of the £200k which will need to be funded by your pension scheme)
Have the premises independently valued and rent assessed and appoint solicitors
Create a SSAS or SIPP pension (you can include other people in your SSAS or SIPP investments)
Transfer into your SSAS or SIPP any funds you have in other pension schemes
As you are the business owner and its your pension scheme your business could make a payment into your pension scheme (pension contributions are tax deductible), the maximum for the last 3 years would be £120k (£40k + £40k + £40k) see details of NRE
You could make a personal payment to your pension and if you are a higher rate tax payer your will get a tax refund via your self assessment return
Then your pension scheme buys the premises from your business and rents it back to the business
Some people have some odd ideas about pensions, here are a few:
Auto Enrolment Pensions
Our company doesn’t need an auto enrolment pension as we already have pensions and would just opt out! not true every employer needs an auto enrolment pension and you can not opt out before you have joined.
One Person companies are not subject to Auto Enrolment however, if the company takes on a second worker and the director and new employee have contracts of employment then both could become workers under auto enrolment.
Pensions aren’t as good as buy to let property
Property is a good investment and Buy to Let property has benefited from excellent capital growth, pension schemes can’t invest in residential property but they can invest in
Industrial units
Offices and shops
Farmland and forestry
Public houses
Nursing homes
Hotels
Marine berth
Pensions are the most tax efficient way to invest because:
You or your company will get tax relief on money paid in (for higher rate taxpayer that’s 40% tax relief)
Pension schemes don’t pay income tax or capital gains tax
When you are over 55 you can have 25% tax free
Pensions are generally outside of the scope of Inheritance Tax
The Pension dies with me
It doesn’t have to die with you, in fact many people are now creating family pension schemes
The potential benefits of the Family Pension Trust are:
Members, including minors, can pool funds together to benefit from a wider range of investment opportunities
Multiple common investment funds allow a variety of bespoke portfolios to be established for some or all members, which widens investment options and can reduce costs
Investment decisions do not have to be unanimous
Different attitudes to risk can be catered for
No minimum fund requirement
Increased borrowing potential
Succession planning options and death benefits
Comprehensive, flexible options to enable retirement income to be phased
The Budget announced that from 6 April 2017 any adult under 40 will be able to open a new Lifetime ISA. They can save up to £4,000 each year and will receive a 25% bonus from the government on every pound they put in.
This is why you should get one!
25% Bonus – free money is always good
It encourages you to save – building up savings for a house or retirement will definitely be of benefit
The under 40’s will probably see this as better than a pension plan, as you can’t access pensions until you are 55
Personally Pensions are still my favourite…
Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)
40% Tax Rate
20% Tax Rate
Year
Pension
No Pension
% Diff
Year
Pension
No Pension
% Diff
1
£10,700
£6,252
71%
1
£10,700
£8,336
28%
2
£22,470
£12,954
73%
2
£22,470
£17,272
30%
3
£35,395
£20,131
76%
3
£35,395
£26,841
32%
4
£49,564
£27,808
78%
4
£49,564
£37,078
34%
5
£65,077
£36,013
81%
5
£65,077
£48,017
36%
6
£82,036
£44,773
83%
6
£82,036
£59,698
37%
7
£100,555
£54,119
86%
7
£100,555
£72,158
39%
8
£120,754
£64,081
88%
8
£120,754
£85,441
41%
9
£142,761
£74,692
91%
9
£142,761
£99,590
43%
10
£166,715
£85,987
94%
10
£166,715
£114,649
45%
11
£192,765
£98,000
97%
11
£192,765
£130,667
48%
12
£221,070
£110,771
100%
12
£221,070
£147,694
50%
13
£251,801
£124,337
103%
13
£251,801
£165,782
52%
14
£285,140
£138,740
106%
14
£285,140
£184,987
54%
15
£321,285
£154,024
109%
15
£321,285
£205,365
56%
16
£360,445
£170,233
112%
16
£360,445
£226,978
59%
17
£402,846
£187,416
115%
17
£402,846
£249,888
61%
18
£448,731
£205,621
118%
18
£448,731
£274,161
64%
19
£498,358
£224,901
122%
19
£498,358
£299,868
66%
20
£552,006
£245,309
125%
20
£552,006
£327,079
69%
Even when you consider:
Your money is locked up till you are 55
You pay tax when you take money out of the pension
You can get 25% out of the pension tax free
The difference in growth is massive
If you do salary sacrifice you can increase the tax effect by saving national insurance too.
On the 5th March George Osborne announce that he would drop the changes that were proposed on 20th January 2016.
The changes that had been proposed were…
The ISA idea
Currently you get tax relief when you pay into pensions and pay tax when you take the money out (after taking 25% tax free), the plan under discussion is to change that so that taxed income goes in and growth in the fund is tax free, like ISA’s.
I think we can all agree the current system is much better, I can’t see that making pensions like ISA’s will encourage investment
Flat Rate Tax Relief
The other plan under discussion is to introduce a flat rate of tax relief on contributions into pension schemes, this would replace the current system where tax relief is based on the actual tax rate you pay.
The BBC explained how this might work
At the moment, basic rate taxpayers receive 20% tax relief, higher rate taxpayers receive 40%, and those with the highest incomes receive 45%.
It is thought that this system could be replaced with a flat rate of anything between 25% and 33%.
Millions of high earners would lose out in such a system, but basic rate taxpayers would stand to gain.
IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.
You can now nominate anyone not just dependents to be the beneficiary.
Since 6th April 2015 anyone who inherits a pension fund from a person who dies before the age of 75 is entitled to receive it tax free and the you can take the money as a lump sum or income. Once over 75 a special tax of 45% applies (previously 55%), you could reduce this by taking a regular income. The tax rate should drop again in April 2016.
Business Premises
Your pension can own Commercial Property, including your own business premises.
In many cases it is better for business premises to be owned by the business owners pension fund because:
The object of the business is not to own its own property, the objective should be for the business to make profits from trading
The business could use cash tied up in the premises to invest in trading activities
Pensions are a very tax efficient method of ownership – no capital gains, no tax on rental profits
Company Pension Contributions are Tax Deductible and Individual contributions get income tax refunds
You may be able to use 3 year Carry Forward to get funds into your pension scheme
Commercial Investment Property
Your pension scheme can own commercial investment property – shops, offices, industrial units.
It can borrow up to a third of the value of the pension scheme.
There is no capital gains tax and no tax on the rental income.
In Specie Transfers
In Specie transfers can be used to move assets into your pension scheme this could incur capital gains and SDLT (Stamp Duty), but you will benefit from tax relief as if you had paid in cash. Currently that means at tax relief of between 20% and 45%.
Once the assets are in a pension scheme transfers ‘in specie’ between schemes are tax free (no capital gains) and no SDLT.
HMRC say…
In our view the assumption by the transferee fund or by the trustees of the transferee fund, of obligations to provide benefits is not chargeable consideration.
Net Relevant Earnings (NRE)
Many owner managed businesses only pay small salaries and take large dividends, this would normally restrict the level of pension contributions allowed, however, their companies can pay the maximum allowed – currently £40k per year.
If you have a SSAS or a SIPP Pension you will probably want to invest some of your funds in Commercial Property – Shops, Office, Industrial Units. Pension funds can borrow money and with the current interest rates low and yields as high as 10%, you can increase your return and use less cash by borrowing.
But one thing you may not know is that connected parties can lend to the fund…
Trustees of registered pension schemes may sometimes wish to borrow funds, for example to enable them to purchase an asset. There is no objection to a registered pension scheme borrowing funds for any purpose providing that the scheme administrator/trustees are satisfied that the borrowing will benefit the scheme and that the borrowing is within the rules laid down by the Department for Work and Pensions (DWP).
A registered pension scheme is treated as borrowing or having a liability of an amount, if that amount is to be repaid or met from cash or assets held for the purposes of the pension scheme.
A registered pension scheme may borrow funds from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms will be subject to a tax charge – see RPSM04104020 .
This is useful where you have paid in the maximum allowed pension contributions but you still have cash, so you could lend to your pension to buy a property.
25% Tax Free
When you retire you get 25% of you pension fund tax free.
The tidal wave of small businesses going through Auto Enrolment has now started with the peak being next year in 2016/17.
So what do you need to do before you stage?
Find out your staging date, this the date when your obligation under Auto Enrolment will start, the Pension Regulator calculator is a good place to start
Nominate a person to be the Pension Regulators key contact and register their name with the Regulator
Draw up a Project Plan and consider whether you need help (60% of companies currently staging have decided they do need help! and most businesses will start by asking their accountant to help with project management)
Choose a Pension Provider – Nest, Now Pensions and The Peoples Pension are the 3 largest
Makesure your Payroll can provide the analysis needed – Brightpay works with the providers shown below, does your payroll?
In addition you will need to work on elements of the Project Plan such as Assessing the Workforce, Letters to Employees, Considering Postponement etc
David Gauke, the Financial Secretary to the Treasury, said a review of pension taxation would keep savers in mind.
“We need to ensure it is effective in terms of encouraging saving, and it is going in the right place,” he said.
Basically there are 2 changes under review..
The ISA idea
Currently you get tax relief when you pay into pensions and pay tax when you take the money out (after taking 25% tax free), the plan under discussion is to change that so that taxed income goes in and growth in the fund is tax free, like ISA’s.
I think we can all agree the current system is much better, I can’t see that making pensions like ISA’s will encourage investment
Flat Rate Tax Relief
The other plan under discussion is to introduce a flat rate of tax relief on contributions into pension schemes, this would replace the current system where tax relief is based on the actual tax rate you pay.
The BBC explained how this might work
At the moment, basic rate taxpayers receive 20% tax relief, higher rate taxpayers receive 40%, and those with the highest incomes receive 45%.
It is thought that this system could be replaced with a flat rate of anything between 25% and 33%.
Millions of high earners would lose out in such a system, but basic rate taxpayers would stand to gain.
First lets have a recap on why Pensions are a fantastic investment and a great way to save tax.
Inheritance Tax
IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.
You can now nominate anyone not just dependents to be the beneficiary.
Since 6th April 2015 anyone who inherits a pension fund from a person who dies before the age of 75 is entitled to receive it tax free and the you can take the money as a lump sum or income. Once over 75 a special tax of 45% applies (previously 55%), you could reduce this by taking a regular income. The tax rate should drop again in April 2016.
Business Premises
Your pension can own Commercial Property, including your own business premises.
In many cases it is better for business premises to be owned by the business owners pension fund because:
The object of the business is not to own its own property, the objective should be for the business to make profits from trading
The business could use cash tied up in the premises to invest in trading activities
Pensions are a very tax efficient method of ownership – no capital gains, no tax on rental profits
Company Pension Contributions are Tax Deductible and Individual contributions get income tax refunds
You may be able to use 3 year Carry Forward to get funds into your pension scheme
Commercial Investment Property
Your pension scheme can own commercial investment property – shops, offices, industrial units.
It can borrow up to a third of the value of the pension scheme.
There is no capital gains tax and no tax on the rental income.
In Specie Transfers
In Specie transfers can be used to move assets into your pension scheme this could incur capital gains and SDLT (Stamp Duty), but you will benefit from tax relief as if you had paid in cash. Currently that means at tax relief of between 20% and 45%.
Once the assets are in a pension scheme transfers ‘in specie’ between schemes are tax free (no capital gains) and no SDLT.
HMRC say…
In our view the assumption by the transferee fund or by the trustees of the transferee fund, of obligations to provide benefits is not chargeable consideration.
Net Relevant Earnings (NRE)
Many owner managed businesses only pay small salaries and take large dividends, this would normally restrict the level of pension contributions allowed, however, their companies can pay the maximum allowed – currently £40k per year.
If you have a SSAS or a SIPP Pension you will probably want to invest some of your funds in Commercial Property – Shops, Office, Industrial Units. Pension funds can borrow money and with the current interest rates low and yields as high as 10%, you can increase your return and use less cash by borrowing.
But one thing you may not know is that connected parties can lend to the fund…
Trustees of registered pension schemes may sometimes wish to borrow funds, for example to enable them to purchase an asset. There is no objection to a registered pension scheme borrowing funds for any purpose providing that the scheme administrator/trustees are satisfied that the borrowing will benefit the scheme and that the borrowing is within the rules laid down by the Department for Work and Pensions (DWP).
A registered pension scheme is treated as borrowing or having a liability of an amount, if that amount is to be repaid or met from cash or assets held for the purposes of the pension scheme.
A registered pension scheme may borrow funds from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms will be subject to a tax charge – see RPSM04104020 .
This is useful where you have paid in the maximum allowed pension contributions but you still have cash, so you could lend to your pension to buy a property.
25% Tax Free
When you retire you get 25% of you pension fund tax free.
The potential benefits of the Family Pension Trust are:
Members, including minors, can pool funds together to benefit from a wider range of investment opportunities
Multiple common investment funds allow a variety of bespoke portfolios to be established for some or all members, which widens investment options and can reduce costs
Investment decisions do not have to be unanimous
Different attitudes to risk can be catered for
No minimum fund requirement
Increased borrowing potential
Succession planning options and death benefits
Comprehensive, flexible options to enable retirement income to be phased
Hargreaves Lansdown have a very helpful article on their Family SIPP which includes this example
Please note – always take professional advice from qualified professionals before setting up a pension, making investment decisions and transferring assets
most pensions, including state pensions, company and personal pensions and retirement annuities
interest on savings and pensioner bonds
rental income (unless you’re a live-in landlord and get £4,250 (£7,500 from April 2016) or less)
benefits you get from your job
income from a trust
dividends from company shares
So how can you pay less income tax?
Here are 10 suggestions…
Pension
When you pay into a pension you get income tax relief on your contributions .
Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)
40% Tax Rate
20% Tax Rate
Year
Pension
No Pension
% Diff
Year
Pension
No Pension
% Diff
1
£10,700
£6,252
71%
1
£10,700
£8,336
28%
2
£22,470
£12,954
73%
2
£22,470
£17,272
30%
3
£35,395
£20,131
76%
3
£35,395
£26,841
32%
4
£49,564
£27,808
78%
4
£49,564
£37,078
34%
5
£65,077
£36,013
81%
5
£65,077
£48,017
36%
6
£82,036
£44,773
83%
6
£82,036
£59,698
37%
7
£100,555
£54,119
86%
7
£100,555
£72,158
39%
8
£120,754
£64,081
88%
8
£120,754
£85,441
41%
9
£142,761
£74,692
91%
9
£142,761
£99,590
43%
10
£166,715
£85,987
94%
10
£166,715
£114,649
45%
11
£192,765
£98,000
97%
11
£192,765
£130,667
48%
12
£221,070
£110,771
100%
12
£221,070
£147,694
50%
13
£251,801
£124,337
103%
13
£251,801
£165,782
52%
14
£285,140
£138,740
106%
14
£285,140
£184,987
54%
15
£321,285
£154,024
109%
15
£321,285
£205,365
56%
16
£360,445
£170,233
112%
16
£360,445
£226,978
59%
17
£402,846
£187,416
115%
17
£402,846
£249,888
61%
18
£448,731
£205,621
118%
18
£448,731
£274,161
64%
19
£498,358
£224,901
122%
19
£498,358
£299,868
66%
20
£552,006
£245,309
125%
20
£552,006
£327,079
69%
Even when you consider:
Your money is locked up till you are 55
You pay tax when you take money out of the pension
You can get 25% out of the pension tax free
The difference in growth is massive
If you do salary sacrifice you can increase the tax effect by saving national insurance too.
2. ISA
Individual Savings Accounts have been around for a few years and very soon the Help to Buy ISA will be launched
Top 10 facts and rules…
Its only available to ‘First Time Buyers’
‘First Time Buyers’ can only have one Help to Buy ISA with one provider
You can pay in £1,000 when you open the account and then save a maximum of £200 per month
The maximum government bonus is £3,000 (but you can lower amounts of bonus if you have less than £12,000)
The scheme will run for 4 years from the date it opens (Autumn 2015)
Couples can have a Help to Buy ISA each which means if they don’t want to wait 4 years could save £12,000 in 25 months where as a single saver would need 55 months
Unlike ISA’s where you open one per year, the Help to Buy ISA will continue for 4 years
You can withdraw funds but if its not to buy a home then you won’t get the bonus
More than 100,000 homes have now been bought with government backed schemes
You will be able to get them at banks and building societies
3. Salary Sacrifice
Salary Sacrifice is a very tax efficient way to give your employees benefits and the most popular benefits are Pensions and Childcare. I wrote a blog back in 2011 which explained how it can save 45.8% in tax and NI
HMRC decided on 9th April 2013 that it was time to “clarify” in their Manuals what are successful and unsuccessful salary sacrifice schemes and have added some further guidance. Their Staff are instructed not to approve schemes (Employment Income Manual EIM42772)….
You (HMRC) may get requests for advice:
on how to set up a salary sacrifice arrangement, or
on whether draft documentation will achieve a successful salary sacrifice.
You (HMRC) should not comment on either of these areas. Salary sacrifice is a matter of employment law, not tax law. The nature of an employee’s contract of employment is a matter for the employer and employee.
The specific updates are:
EIM42750 – Salary Sacrifice – updated – this contains the examples of schemes
EIM42777 – Contractual arrangements – this has interesting comments on childcare and pensions
4. Employment Expenses
As an employee you can claim tax relief for expenses incurred in doing your job, for example business mileage, cycling on business, hotels, meals, business phone calls, in fact anything as long as its business related
If your claim is less than £2500 you can make your claim using Form P87 http://www.hmrc.gov.uk/forms/p87.pdf if its more than £2500 you will need to complete a Self Assessment Return (you need to phone HMRC to request a Self Assessment Return – contact details below), if you know your UTR number you can register and file your Self Assessment Return on line.
5. Dividends
When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year, try the Dividend Calculator above to see how much difference it could make.
6. Tax break for Couples
A new tax break as launched this week from 6 April 2015, which will be eligible to more than 4 million married couples and 15,000 civil partnerships.
The Allowance means a spouse or civil partner who doesn’t pay tax – therefore is not earning at all or is earning below the basic rate threshold (£10,600) – can transfer up to £1,060 of their personal tax-free allowance to a spouse or civil partner – as long as the recipient of the transfer doesn’t pay more than the basic rate of income tax.
7. Tax Free Benefits
Getting tax free benefits will save you lots of tax, here some ideas…
Pensions – Up to £40k can be paid in to you pension scheme by your employer (2015/16) and you can use carry forward to pay in even more
Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – these rules are changing soon.
Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £121,200 or above.
9. Green Company Car
A calculator is available here: http://www.hmrc.gov.uk/calcs/cars.htm and rates are shown in the table below for zero emission vehicles and some of the lower CO2 vehicles.
10. Check your P800
The P800’s are likely to contain errors because:
Large amounts of data are manually input
Estimates especially for Bank Interest and Investment Income
So check the following carefully:
P60 – you get this at the end of each tax year
P45 – you get this when you leave a job
PAYE Coding Notice
P11D Expenses and benefits
P9D Expenses payments and income from which tax cannot be deducted
Bank and Building society statements
Pension Tax Deductions
Its expected that around 3 million people will be asked to pay more tax and around 2 million people will have overpaid.
