Striking a risk-reward balance for pensions
Protecting your future as a business owner should be high on your agenda, says Sophie Kwiatkowski.
Being self-employed, or running your own business can often mean increased financial rewards, but it also comes with more risk. Your income isn’t guaranteed, but, in most cases, the harder you work the more lucrative your business will be. Having a profitable business is important, but as a business owner you are also responsible for your long-term future.
Pensions are one of the best ways to invest for the future and your retirement, as they are tax-efficient no matter what business structure you are operating under.
If you are operating as a limited company you could make employer contributions to your pension from the company. This would be deducted from the company’s profit; therefore, reducing your corporation tax liability. For example, a £30,000 contribution from your company would give a corporation tax saving of £5,700 (£30,000 at 19%).
As the money isn’t paid to you as dividends or salary, you don’t pay any personal tax or national insurance on the investment until you draw down on the pension.
If you are operating as a sole trader or partnership, any contributions made into a pension are given income tax relief on your personal tax returns.
If you were to put £30,000 into your pension fund, the government would add an extra £7,500; meaning the total amount into your pot would be £37,500. Your basic rate band would increase by the total amount, meaning you would pay more tax at 20% than 40%, resulting in a tax saving of £7,500 (£37,500 at 20%).
If you want to manage your own pension, you could look at a self-invested personal pension. Whatever you decide, protecting your future as a business owner should be high on your agenda. It is worth speaking to a financial advisor to get plans in place to suit your personal needs.
For more information visit pfmdental.co.uk/accountancy.