What makes your business successful? The answer is probably, you. This will normally mean that you are hands on with most aspects of your business. Attracting new clients, looking after existing clients, finance, marketing, recruitment, HR, auto enrolment, planning/stockpiling for Brexit etc.
Doing all this does not leave much time for anything else, let alone concentrating on your personal finances. As the new tax year is about to begin, now would be a good time to look at the reasons why you need to invest your time into this area too.
Why move money to your pension?
Pensions remain the one of the most efficient ways to save for retirement and listed below are five reasons to maximise your pension funding:
Reducing tax on profits
You can reduce the amount of tax that you pay on your profits. Let me say that again, you pay less tax. If you are self-employed, profits will be taxed as they are made. This could mean that in a good year you could be attracting tax at 40% or 45%. Paying money into your pension is one way to reduce the tax charged on these profits.
More stable income in retirement
Pension contributions allow you to move money into your own hands for the future. Rather than relying on the strategy of “my business is my pension”. It could be difficult to value your business for potential sale in future or be sure if there will be willing buyers in 5, 10 or 15 years’ time.
Timing of contributions and relief
Contributions to a pension can be made after the end of the business year to which they relate. So, if your business year ends in December for example, you can make pension contribution up until the end of the tax year or later and you will still get tax relief on these contributions. This will ensure that you know what your profits have been and thus plan your contribution accordingly.
Leaving a legacy
You also may want to leave a legacy for your family, a modern pension will not only grow free of income tax and capital gains tax but will also sit outside your estate for inheritance tax purposes. This may not be the case with your business and even if it were, would your partner or family want to take on the business as a going concern?
Let’s look more closely at reducing tax on your profits, how to maximise your profits.
Everybody starts with an annual allowance for pension contributions of £40,000. This annual allowance will start to be lost if your income from all sources is over £150,000. Making a personal pension contribution has the effect of reducing your “threshold income”.
A £10,000 net pension contribution will reduce your “threshold income” by £12,500. The tax man adds the £2,500 to your pension after your pension provider informs them of your contribution, without you having to do anything. You can also then claim tax relief at your highest marginal rate.
So, if your total income or “adjusted income” is over £150,000, making a one off pension contribution will help protect your annual allowance for pension contributions which in turn helps reduce your tax bill and may even allow you to regain some of your tax free personal allowance, which starts to be lost after you are earning over £100,000.
If you are self employed and/or a company director making pension contributions could be a more efficient way of moving money from the business into your own hands and reduce the level of tax that you are paying.
If you are interested in how you can pay less tax and save for your personal future, please feel free to make contact with us at Wingate Financial Planning.