Pensions are tax efficient because tax relief is applied to an individual’s relevant UK earnings, which generally means an employees salary and any bonuses they may receive from their employer.
In the case of business owners who may draw a small salary along with dividends based on their profits, it can mean that the ‘relevant UK earnings rule’ is not workable for a personally funded pension. This is because dividends are not considered ‘relevant UK earnings’ for funding purposes, which therefore limits the maximum personal contribution to the amount of the small salary drawn from the company.
There are effective ways to manage for this through establishing a suitable Directors Pension Scheme, where the company make the contributions on the employee’s behalf.
Where contributions are being made directly by the company these director’s pension schemes are subject to different rules for taxation to those of personal pensions. The use of these has implications for corporation tax and national insurance contributions.
At TFA our advisers will help you set up a Directors Pension Scheme and advise business owners how to transfer wealth from their company into their personal domain in a tax efficient manner. This should be of particular interest to business owners who are higher rate tax payers.
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