How should we structure company pension contributions?

Two serious caucasian men in suits discussing or planning business issues in the office. Colleagues

Ask the expert at Smith & Pinching about how directors and shareholders can structure company pension contributions for tax-efficiency - Credit: Getty Images/iStockphoto

A colleague and I are buying the limited company, where we’ve worked for several years, in a management buy-out. We will be the sole directors and shareholders. We’re trying to decide how to structure our own pay and benefits package. We understand that our business can pay as much as we like into our pension schemes. Is this right?

Matthew Beck Chartered Financial Planner with Smith & Pinching

Matthew Beck is a Chartered Financial Planner with Smith & Pinching - Credit: Smith & Pinching

Matthew Beck of Smith & Pinching responds:

Company pension contributions can form a significant part of your remuneration and offer a great way to tax-efficiently extract profits from your business while helping you save for retirement. Many business owners opt for their full pension contributions to be paid by the company as 'Employer Contributions', which are normally seen as deductible business expenses, reducing your corporation tax liability.

I should mention that there are annual and lifetime limits on pension contributions. I’ve no room in this column to give the details, so please get advice about this before finalising your strategy.

There is another way that your pension can benefit your business: a Self-Invested Personal Pension (SIPP) can hold commercial property, so could purchase your business premises. It can even take out a mortgage, subject to certain rules, to part-fund the property. A market rent would be payable to your SIPPs. SIPPs aren’t right for everyone, so it’s critical to take independent financial advice if you want to consider this.

Alongside pensions, business protection is another important consideration. Key person protection ensures that the business can survive the temporary or permanent loss of anyone critical to the business’s success. You might also consider shareholder protection schemes that allow you to control the future ownership of the business upon the death of one of you.

One option you might want to explore as a benefit for you as directors is relevant life cover. This is life insurance that is taken out by the business to cover the death in service of named individuals. It’s not taxed as a benefit for you as individuals, subject to the “wholly and exclusively for the purpose of the business” test. Premiums are normally allowable as a business expense and benefits written in trust are usually exempt from Inheritance Tax.

Looking at the bigger picture, this is a great time to complete some personal financial planning. It’s important not to lose sight of your own personal goals when embarking on a new business venture and a detailed financial plan will give you a benchmark against which you can measure progress year-on-year. I strongly recommend you take independent advice from a Chartered Financial Planner at this exciting stage of your lives.

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Any opinions expressed in this article do not constitute advice. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates, tax legislation and will also depend on the individual circumstances of each investor.

For more information, please visit www.smith-pinching.co.uk