Why pension planning is crucial for business owners
Running your own business is incredibly rewarding, but planning for a comfortable retirement can feel like an afterthought.
This guide explores the advantages of pension contributions specifically business owners. We’ll break down the different pension options available, highlight the tax benefits for you and your business, and offer strategies to maximise your retirement savings.
A (very) brief introduction
Pensions are a wrapper/account that you save into for your retirement. They offer tax breaks to incentivise you to save for your retirement but can be quite complex. Here’s some of the benefits and drawbacks:
Benefits
- Tax relief on contributions – extra money is added to the pension by the Government if the contribution is made from your salary or savings.
- Reduced tax bills – Pension contributions also can reduce your personal Income Tax or a company’s Corporation Tax bill.
- Tax-free income and capital gains within the pension.
- Inheritance tax friendly: they normally sit outside of your estate so will not be subject to inheritance tax when you die.
- Tax-free cash – some of the pension can be taken out tax free once you reach age 55 (this age rises to 57 from 2028).
- A chance to grow your money – a sensible investment strategy can help provide a financially secure retirement.
Drawbacks
- Complexity – notoriously onerous tax rules which regularly change.
- Fees – management fees are normally deducted from your pension but remember, no investment is free!
- Access restrictions – you can’t access the funds until age 55 (rising to 57 in 2028).
- Taxable income: when you take your money out, some of the income will be taxed.
Pension options for business owners:
- Personal pension
- Self invested personal pension (SIPP)
- Stakeholder pension
| Significant investment choices | Specialist investment options (e.g commercial property & small company shares) | Accept contributions from limited companies | Tax relief available | Inheritance tax friendly | Management Charges cap | |
|---|---|---|---|---|---|---|
| Personal Pension | ||||||
| Self Invested Personal Pension (SIPP) | ||||||
| Stakeholder Pension |
The advantages of pension contributions
Personal contributions
Contributions can be made personally from your salary or made on your behalf from your company.
Personal contributions from salary are limited to ‘100% of your relevant UK earnings’ or the amount of your salary in plain English. There is also a cap of £60,000 unless you have unused allowance from previous tax years; more on this below.
So, if like many business owners you choose to pay yourself a modest salary (say, £10,000) and the balance in dividends, then the amount you can contribute personally is restricted to the value of your salary (£10,000 in this example). With personal contributions 20% tax relief is added to the contribution by the Government and invested in your pension. So, if your salary is £10,000 then you’d only need to contribute £8,000, then the Government would ‘gross this up’ by adding the extra £2,000. It is the gross contribution that is assessed against the salary.
Contributions made to your pension from the company are not restricted by your earnings, so there is scope to make a larger contribution. Here the main considerations are 1) is the contribution within your ‘annual pension allowance’ (more on this below); 2) is the contribution deemed to be ‘wholly and exclusively for the purpose of trade’ (speak with your accountant about this but generally it checks whether the contribution is reasonable).
Company contributions
Pension contributions from the company are usually an allowable business expense so can lead to a significant saving on the Corporation Tax bill (up to £50,000!). For any company contribution to be an allowable business expense, it must be deemed ‘wholly and exclusively for business purposes’. In short, they must be deemed reasonable, so a Managing Director contributing £50,000 to her pension from a profitable company could be seen as reasonable. Making the same contribution for her husband who works at the company part-time might not be.
However you decide to contribute to your pension, building a retirement war chest allows you to retire with confidence, on your terms.
Maximising your pension contributions
The most you can save into a pension is limited to the pension annual allowance. In the 2024/25 tax year the pension annual allowance is £60,000 but it is possible to ‘carry forward’ unused annual allowance from previous (up to 3) tax years. Here’s an example:
| Tax year | Annual Allowance | Used | Unused |
|---|---|---|---|
| 2024/25 | £60,000 | £0 | £60,000 |
| 2023/24 | £60,000 | £30,000 | £30,000 |
| 2022/23 | £40,000 | £20,000 | £20,000 |
| 2021/22 | £40,000 | £10,000 | £30,000 |
| £140,000 |
In this example, £140,000 could be contributed to a pension in the 2024/25 tax year. If this was made by a personal contribution from salary, it would ‘cost’ you £112,000 and the £28,000 tax relief would be added by the Government (£112,000 + £28,000 = £140,000). To do this you’d need a salary of at least £140,000 in the same tax year that the contributions is made.
If your company made the contribution, it’s not restricted to your salary and £140,000 would usually lead to a Corporation Tax saving of £35,000. We’d recommend agreeing any large contributions with your accountant before proceeding.
Lifetime allowance
The lifetime allowance was abolished on the 6th April 2024 and replaced with three new pension allowances.
Seeking professional advice
The most important question to address is: how much do you need to contribute for your perfect retirement? At Abode Financial Planning Cirencester, we help our clients calculate this by building a comprehensive financial plan, agreeing what’s affordable and how much the rules allow them to contribute.
The pension tax rules are notoriously complicated and constantly in a state of flux. A qualified and experienced independent financial planner can provide expert pension advice and help you to navigate this complexity and ensure you don’t land an unexpected tax bill.
Pensions are usually invested in various assets. A professional adviser can help you understand investment risk and help you decide how much risk you should take with your pension investments. A good adviser can also help you navigate the ups and downs of the stock market and increase the likelihood of meeting your retirement goals. As Adam Smith author of ‘The Money Game’ says: ‘If you don’t know what you are doing, the stock market is an expensive place to find out’.
Conclusion
Running a successful business is a fantastic achievement, but planning for a comfortable an exciting retirement is equally important. Pensions offer a tax-efficient way to build a nest egg and secure your financial future. With various contribution options and the potential for significant tax savings, maximising your pension contributions makes sound financial sense for business owners.
Don’t leave your retirement to chance. Contact Abode Financial Planning today for a initial consultation. We will help you:
- Calculate your retirement needs.
- Understand the different pension options available.
- Develop a personalised pension plan that maximises your tax benefits.
- Invest your pension contributions strategically to achieve your retirement goals.
Take control of your financial future. Secure a comfortable retirement you deserve. Contact Abode Financial Planning today!
Investment risk information
Please note, the value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
This information is for general information only and does not constitute advice. The information is aimed at retail clients only.
Past performance is not necessarily a guide to future performance.
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Abode Financial Advisers is an Independent Financial Advisor in Cirencester.
Abode Financial Advisers is a financial adviser based in Cirencester, Gloucestershire. Abode Financial Planning is an independent financial advice firm offering comprehensive financial planning services, including: independent financial advice, retirement planning, pension advice, investment advice, wealth management, and inheritance tax planning.
If you wish to discuss your situation, contact us for a no-obligation initial call, held at our expense. Call us on 01285 703 060.
Abode Financial Advisers is located at Watermoor Point, Watermoor Road, Cirencester, Gloucestershire, GL7 1LF.