Smart business owners don’t need to worry about headlines like these:
‘Boris Johnson and new chancellor Rishi Sunak could strip higher earners of their 40% pension tax relief’.
Yes, it’s the annual round of rumours and scaremongering that’s well under way ahead of the (now re-confirmed) Spring Budget on 11th March.
Every year, for as long as I can remember there’s been speculation about tax and rule changes to pensions. It’s not helpful for financial and retirement planning.
Often nothing happens. Or when it does the change hasn’t been predicted.
One year I had a call from someone convinced that his tax free lump sum was going to be taken away. He didn’t need the money but he took it all out and put it in a savings account. Nothing happened and he admitted afterwards that he’d over reacted.
This time around there’s talk (again) about reducing the tax relief for personal pension contributions to 20%.
This isn’t new. There’s been speculation about reducing tax relief on pension contributions for for some time now. A single 27% flat rate for everyone was mooted at one point.
But here’s the thing. A lot of the higher earners we advise will not be affected by this. Why?
Because they’re business owners. And rather than paying personal pension contributions, they use their company to fund their pension instead.
If you’re reading this and you own a profitable business there’s a good chance that you’re paying yourself in the form of salary and dividends. It’s more tax efficient and flexible.
And if you’re like a lot of business owners we work with, you probably take just enough to cover your living expenses and lifestyle. No more.
This can cause its own problems because it means there’s often no surplus for personal savings in the short term, let alone making personal pension contributions.
Regular and one off company pension contributions solve this problem.
It’s effectively additional income (albeit for the future), but not treated as a taxable benefit.
And because it’s an allowable business expense the company can set it against profits and receive corporation tax relief. 19% in the current year, 18% from 1 April 2020.
So it’s hard to see how reducing higher rate tax relief on personal pension contributions will impact on this strategy.
The people it will effect are those senior employees in the public sector. The doctors and civil servants who are paying into final salary pension schemes.
That said, let’s not forget that even a contribution towards your pension of 20% is still a great incentive.
Particularly when part of what you get back at retirement is a tax free lump sum.
Oh wait. No. I haven’t heard anything to suggest that the tax free lump sum is changing…
Let’s see what happens on the 11th March.
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