Why Owner-Directors should Start a Small Self Administered Scheme (SSAS)
In July, the chancellor introduced changes to UK pension and tax rules that will affect many business owners and directors. Pension freedom amendments had been announced in April, but in July, some additional features of the tax and pensions reform were announced, including annual pension contributions limited to £10,000 per annum, and a higher tax on dividends.
The government’s strategy is to entice people to save for their retirement and, at the same time, put an end to tax evasion—but that does not include the legal "avoidance" known as tax planning, you understand. Paying into a pension is a very good tax-planning incentive, but in particular, the SSAS is a concept that can help you shore up some commercial financial muscle as well as protecting the future finances of your whole family.
The highlights of the July 2015 budget can be seen HERE.
Government increased the tax on dividends and with that, any savvy business owner would have thought, therefore, that it would be wise to pay more of their earnings into their pension pot to reduce tax and ensure that they used up all of their annual allowance. However, from 6 April 2016, the annual allowance is reduced to £10,000 for anyone earning over £150,000.
From 6 April 2016, where gross income (including pension contributions and income sacrificed in salary sacrifice arrangements) is between £150,000?£210,000, the annual allowance is reduced by £2 for every £1 of earnings so, at £210,000 the annual allowance is £10,000.
Of course, you can and should still carry forward from 2013/14, 2014/15 and 2015/16 at £50,000, £40,000 and £40,000, respectively, regardless of earnings. Don’t forget that alongside and prior to this, the March 2015 Budget had already announced a reduction to an individual’s total lifetime retirement savings.
Four possible ways to make the most of the new pensions and dividends legislation
- Pay yourself a salary, dividend, and pension contribution combination that allows you to maximise pension contributions of £40,000 p.a. to minimise tax.
- Carry-forward pension contributions for the last three tax years if no pension contributions have been paid in that period, but if you’ve been a member of any UK pension scheme then a total of £180,000 can be paid before 5 April 2016. From April 2016, even those with gross income in excess of £210,000 can pay £140,000 assuming they have paid nothing for the previous three tax years and previously been a member of a pension scheme.
- If you’re lucky enough to have a pension fund in excess of the forthcoming Lifetime Allowance, register for protection to give you a higher Lifetime Allowance of £1,250,000.
- Involve the family, by bringing spouses and children into the business, equalise earnings packages across family members and maximise pension contributions for all of them via a family pension scheme. This will reduce the overall tax burden, maximise retirement savings, and create a tax-exempt family pot of money, which can be invested in a broad variety of ways, to suit both the business and the family. This is the highlight, the SSAS.
Small Self Administered Scheme (SSAS)
With a pension that’s run not unlike a business, the SSAS is a tax-efficient, flexible, and safe means to build up a pension pot and shore up investment for your business.
Highlights of the SSAS
- A stand-alone pension scheme with its own trust deed and rules;
- Legally ring-fenced from the establishing employer, the scheme members, and the SSAS provider;
- All SSAS members are also trustees so everyone has genuine decision-making powers;
- Each SSAS has its own unique bank account allowing it to operate much like a tax-free business;
- Each account has full FSCS protection unlike a pooled client account;
- Although the SSAS is established by a company, non-employees can also become members. This means that family members can join the scheme and benefit from its flexibility;
- The SSAS has the widest range of investment options of any pension arrangement in the UK: you can:
- Buy commercial property;
- Make business investments;
- Buy shares;
- Offer a secure loan to a contributing employer;
- Take out a loan;
- Investments can change without re-registering;
- Investments can be earmarked for specific members, or pooled, or there can be a combination of both;
- Each member has their own choice from the full range of retirement options available, including passing it on to the next generation, taking a lump sum, or buying an annuity.
This is definitely worth looking into. Fees to set up and run the SSAS are a deductable expense against Corporation Tax and you can claim back the VAT. To find out more about how the advantages outweigh any disadvantages call your account manager today.