Developing and running a successful business is usually a hugely demanding and incredibly time-consuming vocation; hopefully offset by the enjoyment and satisfaction that this can bring – and ideally, some healthy financial rewards over the long-term.
It is therefore no surprise then, that business owners often overlook (or simply don’t have time) to review or attend to financial planning matters. Take pensions for example: it is estimated that 4.8 million people in the UK run their own business, but only 14% of them are saving into a pension. Whether a sole trader or a limited company owner, paying into a private pension not only helps you make provision for a healthy retirement; it can also help you save tax too.
What are the tax benefits?
For business owners and company directors: contributions to pensions can be offset against corporation tax. This can be a great alternative (or additional) form of remuneration to salary and dividends. Your company can make gross pension contributions of up to £40,000 per annum into your pension scheme and there is also carry forward: this allows you to make use of any unused allowance during the previous three tax years (up to a further £120,000). Unlike salary, pension contributions are exempt from National Insurance of 13.8%.
For sole traders and partnerships: contributions to pensions can be offset against your income tax liability. The pension contribution can be up to 100% of earnings (subject to the £40,000 annual allowance; however, carry forward can also be used).
Those drawing high incomes from the business will need to be mindful of the tapering of the annual allowance: This affects people with a taxable income over £150,000 and means that for every £2 of income over £150,000, their annual allowance is reduced by £1. The maximum reduction is £30,000 and so those with an income of £210,000 or more have an annual allowance of £10,000. Either way: making pension contributions is a valuable tool all business owners should be utilising – and that’s before we look at other potential benefits such as being able to use your pension to purchase your commercial premises.
Tax-efficient life cover
Whist many business owners will hold some form of life policy – often linked to a mortgage or similar; very few we come across are making use of the most tax-efficient options available to them. Here we will discuss the benefits of Relevant Life Cover.
What is Relevant Life Cover?
Put simply, this is a term assurance policy allowing businesses to provide tax efficient life cover for their employees (including salaried directors). It is designed to pay a lump sum if the employee dies or suffers from a terminal illness. Some providers have a ‘significant illness’ option, which can pay a lump sum if the employee is diagnosed with a condition covered by the policy which leads to retirement or anticipated retirement.
This type of policy can de ideal for smaller or a one-man Limited Company. It can also be used for large companies where there is a need to put in place a bespoke arrangement for key directors providing a greater benefit.
Key criteria & eligibility
• The life covered must be a UK resident employee of a UK resident business. This includes salaried company directors/partners and single (salaried) directors of a limited company (e.g. IT contractors);
• Equity partners, sole traders and anyone treated as being self-employed are not included;
• The policy owner(s) can be a Limited Company, a Limited Liability Partnership, the individuals within a Partnership or a Sole Trader;
• The employer is automatically a trustee and can appoint up to three others
(the life covered could also be a trustee);
• The policy is set-up under a discretionary trust and the potential beneficiaries include the employee covered, their spouse and any children;
• The trustees have discretion to pay to any potential beneficiary and could also use their discretion to pay any terminal illness or employee significant illness benefit to the employee covered.
Tax advantages for the business
• The premiums should be treated as an allowable expense for the business creating a corporation tax saving;
• There are no NI contributions on the premiums.
Tax advantages for the employee
• Premiums are not usually treated as income paid to the employee or a benefit in kind;
• Benefits will usually be paid free of Income Tax, Capital Gains Tax and NICs;
• As benefits are held under trust they should not be treated as part of the employee’s estate for Inheritance Tax purposes.
• Finally, unlike a Death-In-Service benefit: the benefit paid on death won’t form part of your Pension Lifetime Allowance – a key advantage for those with larger pensions.
Time for a financial review?
Here are just a few examples of the financial and tax planning opportunities available to business owners. We can work with you to develop a detailed and bespoke financial plan that will ensure you are maximising every financial planning opportunity available to you and in the most tax-efficient manner possible.
To arrange your free initial consultation, or if you would just like to ask a few questions: please give us a call or complete an enquiry form via our website.