Directors’ Pension Adviser Cambridge

A Director’s pension is not just about saving for retirement, it is a great way to extract business profits tax-efficiently and for your benefit.

Did you know that a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) can invest in business assets like commercial property and even make loans back to your Company?

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"My business is my pension"

That’s a common misconception. You may be fortunate and sell your business one day, but many businesses are so dependent on one or two individuals and that they may not be attractive to a buyer once you retire. Also, let’s be honest, some businesses fail or get wound up when the directors retire.

Further, pensions are held under pension trust arrangement. Therefore, creditors can not claim your pension if your business gets into debt provided the contributions have been regular and paid in for the purpose of providing retirement benefits.

Pensions for company directors are also much more tax-efficient than putting money into a bank or building society account or even an ISA, for example. None of the alternatives benefit from the generous tax-relief available to pension schemes.

Directors’ pensions are normally funded by company contributions only

Directors’ pensions are normally funded by company contributions only, but non-business owning directors can also make personal contributions that will qualify for tax-relief at their highest marginal rate. When personal contributions are paid in by a director the most tax-efficient way of doing that is through ‘salary exchange’ where the personal contributions are taken from gross earnings by reducing the directors salary in lieu of increased pension employer contributions thus effectively benefitting from higher rate income tax relief at source and achieving savings on national insurance contributions for both the director and the company as his employer. Add to this the investment flexibility that a director’s pension can provide and in certain circumstances the ability to make commercial loans back to the company, directors’ pensions can double up as a very useful business planning tool.

What if I need my money now?

Since April 2015, and if you are aged at least 55, new legislation commonly referred to as “Pensions Freedom” allows more flexibility on how your pension fund can be accessed. However, one has to be careful of the tax consequences as normally only 25% of a pension fund can be taken tax-free and anything taken above that is taxed as income at one’s highest marginal rate but unlike earned income, without being subject to National Insurance Contributions (NICs).

Things to consider:

HMRC limits – An annual allowance limits the amount someone can pay into pension schemes each year before they must pay tax. It is £60,000 in 2024/25. It is possible for the employer to pay the full amount regardless of the Director's salary provided certain conditions are satisfied.
HMRC limits – An individual cannot usually receive tax relief on pension contributions worth more than 100% of their annual earnings. However, referring to the point above, contributions paid by the employer are treated differently. They are treated as a business expense and, therefore, deductable for the purposes of calculating profits. This can result in the reduction of the employer's corporation tax liability.
HMRC limits – The annual allowance is tapered (reduced) for higher earners. It is reduced by £1 for every £2 someone earns over £260,000 (including pension contributions). Tapering stops when the annual allowance reaches £10,000.
Abolition of the lifetime allowance - There was a limit on the amount people can build up in pension schemes over their lifetime and still receive tax relief. At the Spring Budget 2023, the government announced that it would abolish the lifetime allowance. It started this process by removing the tax charge for exceeding the lifetime allowance from 6 April 2023 and abolished the lifetime allowance fully in the Finance Act 2024 from 6 April 2024.
Values – The investments held within a pension can fluctuate in value and are not guaranteed, neither are the benefits at retirement. These will be affected by economic circumstances, including interest rates at that time.
Registration – The pension scheme must be registered with HMRC in order to benefit from tax relief.

In a nutshell:

HMRC limits – the annual allowance for contributions is £60,000 (2024/25) and subject to earnings, and unused annual allowances can be carried forward from the previous 3 years. The annual contribution limit may be reduced to as low as just £10,000 per annum for someone earning more than £260,000 per annum.
Abolition of the lifetime allowance - At the Spring Budget 2023, the government announced that it would abolish the lifetime allowance. It started this process by removing the tax charge for exceeding the lifetime allowance from 6 April 2023 and abolished the lifetime allowance fully in the Finance Act 2024 from 6 April 2024.
Legislation – The rates and limits on pension tax-relief are set by government legislation. As with all legislation, these are subject to change in the future.
Values – The investments held within a pension can fluctuate in value and are not guaranteed, neither are the benefits at retirement which will be affected by economic circumstances.
Registration – The pension scheme must be registered with HMRC in order to benefit from tax relief.