What are Self-Invested Personal Pensions (SIPPs)?
- Credit: Smith & Pinching
My brother and I are sole shareholders and directors of our company. It makes significant profits and we’ve been paying ourselves a low salary plus a decent dividend. We’d like to take more profit out of the business but are concerned about the level of tax we’d each pay. We understand we may be able to use pension contributions but are not sure how tax-efficient that would be. What do you think?
Matthew Beck of Smith & Pinching responds:
Pension contributions are a useful way to extract profits for the benefit of business owners. With careful planning, you can achieve a balance that will be tax-efficient for both you and the company.
Employer’s pension contributions can usually be counted against profits for Corporation Tax purposes, giving a significant saving to the company. There is no limit to the amount that your company can contribute to your pension – it isn’t limited by your earnings – but in order to qualify, the contributions must pass what is known as the 'wholly and exclusively test'. Your accountant will be able to confirm if you can apply this to the contributions.
You might wish to consider Self-Invested Personal Pensions (SIPPs). SIPPs are a more sophisticated investment route so are not suitable for everyone but they do allow a wider range of investment options than standard personal pensions, including commercial property. If it would be of benefit, your SIPPs could invest in your business premises, with a market rent payable by your business to your pension scheme. Your SIPPs can take out a mortgage of up to 50% of the value of the fund, if needed.
Using employer’s pension contributions rather than increasing salary or dividends will help to keep your own tax liabilities in check. However, you must factor in the Annual Allowance for pension contributions, which currently stands at £40,000 or 100% of your earnings (whichever is lower). Importantly, unused Annual Allowance can be carried forward for up to three years, although you must use the current year’s allowance first.
Please note that the Annual Allowance is reduced to £4,000 if you have started taking flexible benefits from your pension, and is subject to a tapered reduction for very high earners.
I strongly recommend that you take independent advice from a Chartered Financial Planner to ensure that you optimise the allowances available and adopt the most tax-efficient route for you and your business to both extract profits and achieve your retirement goals.
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Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk