Case study 06.01.2009
Read our case study on income planning to find out how a company director, close to retirement and with little pension provision, can start funding for retirement.
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Business Financial Planning
A new approach to income planning
This idea is perfectly suited to a company director who is close to retirement but has not made serious pension provision.
- Increase the value extracted from a company's profits.
- Reduce a company's corporation tax bill.
- Increase the funds available for company investment.
- Generate a pension scheme valued at more than twice its cost to the company.
A pdf version of this case study is available to download from the Library.
Take an entrepreneurial director who is the driving force behind a successful company making significant profits, £210,000 this year. The director, who is aged 55, draws a gross salary of £83,000 per annum, which equates to a take-home pay of £54,940, after income tax and national insurance is paid.
| Gross annual salary | £ 83,000 |
|---|---|
| Less tax | £ 23,826 |
| Less national insurance | £ 4,234 |
| Net income | £ 54,940 |
Our aim is to maintain a steady income for the director and to start to fund for a pension, in a scheme which will hold assets for use by the business.
Income planning
The director's salary is reduced to £4,940, which incurs no tax. The company pays £200,000 into a Rowanmoor Pensions Small Self-Administered Scheme (SSAS). The SSAS trustees immediately provide the director with a 25% tax-free lump sum (pension commencement lump sum) , bringing income for the year back to £54,940
| Annual | |
|---|---|
| Gross salary | £ 4,940 |
| Tax-free lump sum benefit | £ 50,000 |
| Less tax | £ 0 |
| Less national insurance | £ 0 |
| Net salary | £ 54,940 |
Pension planning
The contribution is paid into a Rowanmoor Pensions SSAS and after the immediate payment of 25% of the fund to the director, the remaining £150,000 is retained in the fund to provide pension benefits in the future.
Funds within the pension scheme can be used to invest in the company. A loan of up to 50% of the net value of the scheme's assets can be made to the business.
| Contribution | £200,000 |
|---|---|
| Tax-free cash paid | £50,000 |
| Pension fund | £ 150,000 |
| Scheme loan to company | £ 75,000 |
The figures look good. The level of the director's pay has been maintained and the pension scheme has funds valued at £150,000 but how is the company's finance affected?
Business financial planning
If the business continues to amass profits then the director's salary, employer's national insurance and corporation tax will reduce the funds in the company to £72,975.
By making the pension contribution and reorganising salary, the company's retained profit is reduced to £2,960.
There is no corporation tax or national insurance to pay and the funds available to the company for investment are increased by £4,985.
| Not using a Rowanmoor Pensions SSAS | Using a Rowanmoor Pensions SSAS | |
|---|---|---|
| Pension contributions | N/A | £200,000 |
| Profit | £210,000 | £ 10,000 |
| Corporation tax | £44,100 | £ 2,100 |
| Salary | £ 83,000 | £ 4,940 |
| National insurance | £ 9,925 | £ 0 |
| Retained profit | £ 72,975 | £ 2,960 |
| SSAS loan to company | N/A | £ 75,000 |
| Funds available for company investment | £ 72,975 | £ 77,960 |
Conclusion
By investing in a Rowanmoor Pensions SSAS:
- the company has £2,100 corporation tax to pay and no national insurance liability in respect of the director, a saving of £51,925;
- the level of the director's income is maintained at £54,940 p.a.;
- the director pays no income tax or national insurance contributions, saving £28,060;
- a pension fund of £150,000 is created;
- the company's profit is reduced by £67,915 but this is also the net cost of the £150,000 pension fund;
- the funds available to the company for investment are increased by £4,985 to £77,960.
Provided that the company's profits allow, this process can be repeated each year until the director leaves service, reducing the overall tax and national insurance liability of the company and the director whilst retaining the director's net take-home pay and building a substantial pension fund.
Technical Notes
The overall maximum loan to the principal or any participating employer is 50% of the net assets of the scheme, valued at the date of the loan, subject to:
- secured with a first charge on assets of adequate value;
- maximum term of five years;
- minimum interest rate of 1% above the average base lending rate of the 6 leading high street banks;
- repayment of capital and interest in equal instalments over the period of the loan;
- one missed annual payment may be rolled over once.
Loans may also be made to third parties but it is not possible to make loans to the member trustees or anyone connected to them. This means that a SSAS established by a self-employed business owner or partnership may not lend money back to their business.
Schemes that breach the investment rules, make payments to members, or pass assets to members or connected parties outside of the new rules, will be subject to a tax charge or penalties or both.
We believe the above case study is not caught by the legislation under the heading "Recycling of Lump Sums". It is important that advice is sought and obtained on the specific circumstances before embarking on any tax planning concerning the use of pensions.
The information contained in this document is based on Rowanmoor Pensions' understanding of current pensions law and taxation.
Calculations are based on tax and national insurance data for the 2008/2009 tax year.
This information relates to the Rowanmoor Pensions SSAS.