“Depending on how the director is remunerated, it may also be advantageous to put in place a salary sacrifice scheme. This means that if the director is salaried, they can choose to give up part of that salary in exchange for an employer pension contribution.
"Since the sacrificed salary does not attract income tax or NICs from either the employer or employee, the employer will often pay the ‘saved’ NICs into the pension as well. This results in the director getting a bigger pension contribution at a reduced cost to themselves.”
The contribution will need to pass the ‘wholly and exclusively’ test to be an allowable expense.
HMRC’s test is there to ensure that a director’s remuneration – salary, dividends, benefit in kind and pension contributions – are reasonable for the duties and work completed.
Contributions cannot be more than a company’s annual profit, but if there was no profit, then there would be no corporation tax.
Directors do not have to contribute from their limited company and that they can make a contribution from personal cash, but the company will not benefit from corporation tax relief.
Unfortunately, many business owners may fail to effectively extract wealth from their business without help because their focus is naturally on making their businesses profitable.
Batchelor says: “In many cases, business owners fail to plan effectively because they’re extremely busy and focused on making their businesses profitable and secure in the here and now. This is completely understandable, as keeping the ship on an even keel can consume most, if not all, of their available time and attention.
"If they don’t have the benefit of professional advice from a financial planner, accountant or lawyer, however, what they perceive as the best course of action may not be the optimum route."
He adds: "Since many business owners pour a high proportion of their personal assets into their business, they may regard it as effectively being their pension and this can sometimes mean that other investments, such as pensions, take a back seat.
"Financial planners can help by working with their accountancy colleagues, using cash flow projections, and helping business owners set aside a prudent amount of money to allocate to pensions or other investments, that will ensure the business owner is well provisioned in the future."
Getting advice
Small business owners often do not fully understand the benefits of how they can extract wealth from their businesses into pensions as well as the complexities of actually doing it, which often results in no action being taken.
Seb Ridout, chartered financial planner at First Wealth, says: “Expecting them to fully understand the intricacies of how to extract profit from a limited company in a tax-efficient manner and to then go on and take advantage of all these benefits by investing into pensions is possibly unrealistic.
