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Director’s Pensions
The text below gives the basic rules. Pensions are complicated products –specialist adviser should be consulted.
General Rules
The general rule is that you can contribute as much as you earn into a pension fund and receive income tax relief each tax year but only up to certain limits. Any excess over the limits paid into the fund is subject to a recovery charge when payment is subsequently withdrawn.
Contributions to £3,800 gross (£2,880 net of basic rate tax) can be made by a non-earner but if earning then the maximum amount of relievable contributions in any year is the amount of the individual’s ‘net relevant UK earnings’ chargeable to income tax for that year or the Annual Allowance (‘AA’) of £40,00 whichever is the lesser amount.
There is also a ‘lifetime limit’ of £1,055,000.
Contribution Restrictions
Any amount of contributions can be paid by the director however, the tax relief will be restricted. The AA is reduced by £1 for every additional £2 of adjusted income over £150,000 (pension contributions in the year are added back to work out the total adjusted income). The minimum AA is set at £10,000 for 2019/20, so directors with an annual adjusted income of £210,000 or more will receive the maximum reduction of £30,000 per annum and be left with an AA of £10,000.
As many directors draw a small salary in conjunction with dividends (see Chapter 2 - Running a Company), the ‘net relevant earnings’ rules can mean that pensions funded by the director himself are unworkable because the maximum personal contribution is limited to the amount of the small salary drawn; dividends not being counted for pension funding purposes.
‘Directors’ Pension’
One way to circumvent this issue is to establish a suitable ‘Director’s Pension’ into which the company makes contributions on the directors’ behalf. This is an especially attractive method of tax saving for ‘higher’ and ‘additional rate’ taxpayers. If a husband and wife are both directors’ then both may be eligible to use this method of extracting funds from the company.
How does it work?
Employer pension contributions are considered ‘business expenses’ for the company and as such are tax deductible. There is no limit to the amount of contributions a company may make (although where the company does pay contributions the amount paid is added to the amount, if any that the director has contributed to determine the lifetime allowance limit).
No employee or employer’s NIC payments are due where an employer makes contributions.
Practical Tip
It is not necessary for there to be a dedicated company pension scheme in order to make tax-deductible contributions. Most providers of personal pensions allow the company to contribute.
Contribution restrictions
Should the total of personal and employers’ contributions exceed the AA, then this will produce a tax charge at the directors’ marginal rate. Therefore, many ‘higher rate’ directors could face regular AA tax charges as clawback on contributions made by their employer.
Tax Tip
Small business owners can benefit from the flexibility of holding commercial property in the tax-advantaged environment of a pension and also gain tax relief on their contributions (not covered in this text).
Directors And ‘Automatic Enrolment’
Under ‘Automatic Enrolment’(AE), every company that employs at least one person earning in excess of £10,000 is required to enrol staff into a pension scheme. Staff can opt out of the scheme should they wish but if not and they decide to join, then the employer must also contribute.
The one-person company comprising a single director is not an ‘employer’ under AE and this is the case whether or not the director has an employment contract, therefore, no scheme is required.
Should the company have more than one director, no other staff but at least two of the directors have employment contracts, then all those directors with employment contracts are designated ‘workers’ and as such are subject to the AE rules; those directors without employment contracts are not.
Practical Tip
Unless the Pensions Regulator is advised then they will assume that the company is subject to AE. They can be advised via the Pensions Regulator website
By Sarah Bradford
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