Why a pension scheme could offer double benefits if you own your own business

• As a business owner, getting your company to pay into a pension for you could benefit both you and your company

• It can reduce your corporation tax whilst giving your retirement savings a boost

• If you’ve not made regular company contributions, you might be able to make use of your unused tax allowances

If you are the boss of your own company, you’ll know that there are swings, roundabouts, and plenty of highs and lows in running your own show.

Managing your own business means you’re in charge of all the admin and the tax returns, with or without the help of an accountant. No doubt you have occasionally felt envious of your employed friends, who don’t need to give much thought to that kind of paperwork. And on the subject of pensions, you may well feel very envious of those who get ‘extra’ payments made into their pensions from their employers. Some might even enjoy the kind of ‘gold-plated’ final-salary pensions that can offer them a more certain retirement.

Meanwhile, company owners have to worry about contributing into pensions for those employees who qualify under the autoenrollment rules, which is currently anyone who earns roughly £10,000 or more according to The Pensions Regulator.

While qualifying employees have to be enrolled in a pension scheme, the directors of limited companies without employees can apply to HMRC for exemptions from setting up a pension for themselves. According to the latest data from the Department for Work and Pensions, at the end of 2019 only 57% of micro companies – those with four employees or less – offered a pension plan. Data from the Department for Business, Energy and Industrial Strategy tell us that approximately three quarters of all businesses comprise just the business owners, so many of them could be taking advantage of the exemption.

This may be because for many business owners their personal and professional finances go hand-in-hand. A bad year can be felt very close to home. And there’s always the hope that next year will bring bumper business. You might even by planning to sell the company at the end of your working life to fund your retirement.

But it could prove to be a short-sighted move.

Paying into a pension could save company tax

Many solo director/company owners, without employees, who apply for pension scheme exemption could be missing out on an extremely valuable benefit. That is getting your company to pay into a pension scheme for you.

Saving for your retirement this way means, first and foremost, there’s more money set aside for you when you retire. But if your company pays into a pension, this is a tax-deductible expense that could reduce your company’s corporation tax liability and employer’s national insurance (depending on how much salary you pay yourself).

According to the government’s website, there’s still time to get your company to make a pension payment, ahead of the January 31st deadline for the balancing payments of any tax due for 2019-20 and first Payment on Account for 2020/21.

In case you’re wondering how long that money will be locked away, according to the Pension Advisory Service, you can access your pension savings from the age of 55 except in some extenuating circumstances such as ill health. However, this is set to rise to 57 in 2028 and could rise further in line with increases in the State Pension Age.

How it works: a case study for a higher-rate taxpayer

Ali is a director of his own company that has no other employees and he pays tax at the higher rate. He has also applied for an exemption from setting up a pension scheme as his income is sporadic and he doesn’t want to have to commit to paying a fixed sum.

This year he has £3,000 in profit that he was thinking of taking as a dividend. According to the government website, if he did this the company would pay 19% corporation tax on the money. That would reduce the value paid to Ali to £2,430. When it comes to completing his self-assessment form, Ali would pay a further 32.5% in income tax on the amount over his annual dividend nil-rate band of £2,000. That is according to another government website. So after tax he’ll receive around £2,290. A total reduction of around £710.

Alternatively, he could get his company to put it into a pension scheme for him.

In this case the full £3,000 can go into his pension, without paying corporation or income tax, as it’s a tax-deductible expense. What tax Ali pays on the money in the future when he accesses his pension pot will depend on his circumstances at the time and the decisions he makes. But he could be a lower-rate tax payer, and in the meantime the money has the potential to increase in value.

Company pension payments are not limited by salary

Using your limited company to pay into your pension means there’s no ‘salary threshold’ limitation. If you’re paying into your pension fund yourself, you can’t pay in more than you’ve earned in salary, and dividends don’t count as salary. So if you earn £20,000 a year you can only contribute a maximum of £20,000 to your pension. But company contributions are only limited to the annual pensions savings allowance. Which for the tax year 2020/21 is £40,000, according to the government’s website.

So you could opt to take a reduced salary and not make any personal pension contributions if that suits your circumstances, you can still take your dividends, but your company could put up to £40,000 per year into your pension. Yes, £40,000!

The news gets even better: any unused allowance can be carried forward for three years. So if you haven’t paid anything in for the past three years you can pay in up to £160,000 in year four.

But there are some catches.

The first one: you have to have had a pension plan in place at the time . So you can’t open an account and suddenly transfer in £160,000. But if you haven’t used all your allowance this year because you can’t afford it, you can keep it in reserve for one of the next three years if you have good year and feel you can put a little more away.

The second and third catches? You still need to adhere to the annual salary limit and lifetime allowance. The rules are explained by the Pension Advisory Service.

But keep pension payments ‘reasonable’

Pension payments by your company are allowable business expenses – your company doesn’t pay corporation tax on them, nor employers’ national insurance, and you don’t have any income tax liability. This is provided the pension contributions by your company are ‘reasonable’. They can’t exceed the company’s annual profits, for example, and if you have employees there need to be similar contributions paid to others in the company doing similar work.

You don’t need a specialist company scheme

Most pension providers that offer Self-Invested Pensions Plans (SIPPs) will be able to set you up with a suitable pension scheme that your company can pay into. This usually involves asking you to fill in a form so your company can pay in on your behalf.

More reasons to pay in

Running your own company can be very stressful and take up a lot of your time. It can be hard to get your head above the day-to-day and look ahead to your future financial wellbeing. Paying into a pension scheme (either by yourself or using your company to do this) could make a big difference between the kinds of retirement you could achieve.

Read more: Will I have enough to retire on?

Usually, putting money into a pension also makes excellent financial sense because of the tax-efficiency benefits. Money that would have been spent as tax can instead go towards a potentially more comfortable retirement.

You may need specialist help to make the best decisions for you around company pension payments. Your tax adviser, accountant, or a qualified financial adviser can help you to weigh up your options.

Being a boss is not an easy path to tread. You should certainly treat your employees well and help them to make good provisions for the future – even if your one and only employee is you.