You have the bank holiday weather to thank for this week’s blog topic because it was the falling rain that gave me the idea…
On the face of it, pensions are not the most exciting thing to think about, but they are interesting from a tax perspective and it’s always useful to know how you can maximise your pension pot for the future. Despite the inevitable speculation ahead of each Chancellor’s Budget, pensions remain a very tax efficient vehicle as part of your overall tax and financial planning strategy.
- Personal contributions – depending on your salary, you could get up to 60% tax relief on a personal contribution and, once the money is in your pension, it can grow tax-free.
- Company contributions – many shareholder directors don’t take large salaries and could be restricted in the personal contributions they can make. However, the company could contribute £40k a year (more if earlier years allowances are available) and the contributions should be tax-deductible in the company. Provided the contribution is within certain limits, it should also be tax-free on the individual.
- Pension buying commercial property – this is where there can be real added benefits; your pension could buy your trading premises and charge rent to the company. The rent is tax-deductible in the company and the property can grow in value tax-free in the pension.
- Loans back to the company – it could be possible for the pension to make a loan to your company, with the company paying a commercial rate of interest on that loan. Again, this is tax allowable in the company and tax-free in the pension.
- Tax-free lump sums – don’t forget that once you reach the age of 55, you might be able to access 25% of what’s in your pension as tax-free cash.
Contributions for children or grandchildren
Another option is for parents or grandparents to make stakeholder pension contributions on behalf of their children or grandchildren. If this is done from an early age, the recipient’s pot could grow quite nicely, particularly given the enhancement that is provided by HM Revenue and Customs (HMRC) to the amount paid in. This sort of activity often forms part of an Inheritance Tax (IHT) planning exercise for grandparents who are looking at their options.
As you would expect, there are lots of rules to consider when it comes to pensions because they fall under both tax and financial planning, so it’s vital that you get qualified advice before taking any action. However, pensions are a good tax news story overall – they remain very tax-efficient and can be used to great effect, given the right advice. If you would like to understand how you can make best use of your pension, please email Kate Naylor or call her on 0113 297 6825.