Your pension could save you a fortune!
Did you know that there are over 1,100 tax reliefs and benefits available to company directors?
The tax year end is here! But did you make the most of the tax reliefs and various benefits available to you and your business? Or did the year fly by without achieving all your aims and goals and little time for new innovative financial growth?
Time flies, but if you spent the best part of the year worrying about….
- how to cashflow your business
- where to get the best loan rates
- trying to understand the legalities of inheritance tax and estate planning
- looking at ways you could fund your property investment goals
- trying to implement wealth protection for your family
- trying to keep the balance sheet down to avoid the hefty corporation tax bill
- or generally worrying about the lack of structure to your financial situation
…then looking to your pension could be the hidden answer to alleviating your worries for the next year and going forward.
- For creating powerful business strategies to reduce tax liability
- For the tax efficient purchase of buy-to-let or other investment property
- For business owners looking to invest and grow profits without excessive tax risk
- For streamlined succession planning options for family businesses
- For planning growth strategies and opportunities for entrepreneurs
- For mitigating inheritance tax
- For protecting and passing on assets and wealth
Strategies using your pension, such as started a Small Self-Administered Scheme (SSAS) have been around since the 1970s and are governed by HMRC and The Pensions Regulator. Used and managed correctly, this is where your pension could save you a fortune. In addition, The Family Investment Company has become increasingly popular in the last decade, due to the enviable environment it creates for ensuring tax efficiency whilst still maintaining control. With the right support, these schemes can be coupled to create powerful, tax efficient strategies.
For successful company owners who are making a profit, the protection of that wealth is essential. However, it is also important to consider your IHT position, regardless of age, to both support your own lifetime tax strategy as well as reduce its impact should the worst happen.
The truth about pensions…
How often have you heard that pensions are boring? Outside of your control? Something to think about later? It is a common view, but for most business owners, taking control of your pension is a missed opportunity. We are here to straighten out the common misconceptions.
Fact: pensions can be the catalyst to the perfect strategy for investment, business growth, tax mitigation, and protecting family wealth, not to mention achieving your ideal retirement.
So, let’s start with the basics:
- There is tax relief on pensions for everyone!
- For business owners, the tax benefits are even better…
- Growth on pension funds is tax free!
- The gains that the pension makes on investments are not liable for income tax, meaning investments can grow the pot much faster.
- Pensions are not classed as part of the estate! This means that nominated beneficiaries or pension pots are not subject to Inheritance Tax on the funds.
- The recent budget announced that the lifetime allowance will be scrapped as of April 2024; more can be paid into pensions without fear of penalty.
- Similarly, the annual allowance for individuals paying into a pension will increase from £40,000 to £60,000.
“The power of utilising your pension as a key element of your business and tax strategy has got even better!”
Perfect for business owners
The changes to pension contribution legislation and the general tax advantages offered by pension schemes are especially beneficial for business owners and when structured correctly, the benefits can be game changing!
As a business owner you have both your own personal tax situation to manage as well as your business tax strategy. This is where holistic tax planning using your pension comes into its own: a correctly structured strategy can give you great flexibility and control to plan, manage and grow your own wealth and the growth and tax situation of your business.
The first step a business owner must consider in any tax planning strategy is switching to a pension scheme exclusively tailored for company directors. The Small Self Administered Scheme (SSAS) is the ideal strategy for business owners looking to optimise their tax situation, grow the business, increase the pension pot and protect wealth.
The SSAS is a much more flexible and powerful scheme than a traditional pension. Your pension could save you a fortune and this scheme can be started at any age, as long as you are a company director. With this ‘tool’, greater tax efficiency can be achieved both personally and for the business, as well as enhanced business and pension growth.
So let’s look at some examples of strategies that could be put into place, using your SSAS pension:
- Purchase your business premises via your SSAS
- Charging rent to the trading company will bring down the year end profits (minimising Corporation Tax) whilst also growing the pension pot. In addition, the rent paid is classed by HMRC as an allowed business expense, again triggering tax benefits. Not only does this have advantages for the business and the pension but you become your own landlord!
- Combine your own pensions and pool with others
- A SSAS can invite up to 11 members to join the scheme, which is exclusive to this type of pension. Additional members can transfer in their own funds, continuing to ‘own’ the same percentage of the pot as it grows. Each member nominates their own beneficiaries should the worst happen. The pot is increased and so investment power and growth are escalated.
- Purchase investment property
- A key advantage of this type of pension is that a SSAS can invest directly into Commercial Property or development land. The property can be developed (for residential property it must be sold prior to becoming habitable as a SSAS cannot hold residential property), and commercial property can be rented out by the SSAS. Should the property be sold at a profit, there is no income tax to pay as pensions are not liable for income tax.
- Grow the fund simply with hands-off investments
- For those without the luxury of time to spend on growing the pot, hands-off investments for enviable annual rates are a great option. This could include property loans, stocks and shares, gold and many other asset classes. Hands-off investments require minimal time investment and do not require knowledge of the legalities or extensive understanding of the underlying processes of investments, unlike developing commercial property yourself.
- Loan funds from your pension to your company
- This is known as the ‘SSAS Loanback’. A SSAS is allowed to loan 50% of its total value to the trading company – a common strategy is to take advantage of this and use pension funds to grow the business. By doing so, you are avoiding the lengthy process of sourcing bank loans and all of the costs and time commitment it takes. The SSAS must charge interest on the loan of at least 1% above market base rate. For some, this means the opportunity to fund the business at a lower interest rate than a bank loan offers. However, an even better strategy for growth is to charge a higher rate for the loan, meaning that the SSAS growth is greater, but the company year end profit is reduced, lowering corporation tax. Again, the payment of the loan is classed as a business expense which means additional tax benefits. The loan must be paid in a maximum term of 5 years. At this point, your strategy could then start again, loaning 50% of the now increased pot to the company for another 5 years.
‘Whether looking to cashflow the company or grow the pension pot, the SSAS Loanback offers great flexibility and potential’
- Create a succession plan for your family business
- A SSAS can facilitate much more flexible exit strategies for those wanting to retire on their own terms and timescales. By adding family members to the scheme, succession is simplified as the legalities, fees and taxes are avoided by all members already part of the pension, allowing assets and funds to be passed on and taken flexibly to suit the required succession plan.
- Reduce inheritance tax
- A SSAS can reduce Inheritance Tax to as little as 0%. Children can be added to the scheme as beneficiaries, meaning they can be paid a lump sum upon death of the member, or can continue to be part of the scheme. Family can be added as SSAS members, meaning they already own the scheme assets. These assets are held outside of the estate, so are exempt from an inheritance tax burden.
The above are just a few examples of how taking control of your pension funds is a no-brainer for most business owners. Achieve control and flexibility like never before.
If the above isn’t enough, a Small Self-Administered Scheme (SSAS) can be coupled with a Family Investment Company to achieve even more effective strategies to reduce business tax, increase business growth, safeguard family wealth and reduce inheritance tax – all of this whilst growing the business and legacy. To learn more about this innovative 360o formula, click the button below.
Contact TLPI and save money, time and energy this tax year by letting us illustrate the benefits of tax planning and the many innovative strategies that are available to you today!