How to manage your pension in the UK as an employee, employer, company director or self-employed individual
Retirement may be the last thing on the mind of entrepreneurs, company owners and directors, especially when you are running and scaling a business.
However, knowing the ins and outs of the UK’s pension system allows you to provide the best solution for your employees and their future while planning what is best for you, your businesses, your taxes – and your potential exit strategy.
The three types of pension in the UK
If you live, work, are self-employed or run a business in the UK, the three main ways to build a pension are as follows:
- State pension
- Workplace pension
- Personal pension
The State Pension is a regular payment from the government most individuals can claim when they reach the State Pension age. The amount received will depend on an individual’s National Insurance record. Ten qualifying years on their National Insurance record are needed to receive any State Pension, and 35 qualifying years are needed to get the full new State Pension, currently £185.15 per week.
For most people, the state pension is only one part of their retirement income and will be supplemented by a workplace pension, a personal pension – or both.
The workplace pension scheme automatically applies to most employees and employers with a few exceptions, for example, company directors.
As a business owner or company director employing people, you must make pension contributions for all staff who:
- Are aged between 22 and the State Pension age
- Earn at least £10,000 a year
- Usually, work in the UK (this includes people who are based in the UK but travel abroad for work)
Most workplace pensions in the UK are so-called defined contribution pension schemes. The pension money is deposited into investments by a pension provider like Nest, which offers a no-cost pension scheme for small businesses starting from just one employee. Most pension providers will allow for options of low, medium or high-risk investments.
From April 2019, the minimum workplace contributions are as follows on all earnings between £6,240 and £50,270 a year before tax:
- 3% for the employer
- 5% for the employee
- 1% tax relief
For example, if an employee’s contribution is £40 per salary month, the employer’s contribution will be £30. With an additional £10 in tax relief, £80 in total are added to the pension pot.
In a defined benefit scheme, the amount an employee will receive will depend on the pension scheme rules and not on how much money is deposited into the pot. The defined benefit scheme is also called the“final salary” or “career average” pension scheme.
Personal pensions are usually arranged by employees themselves. However, some companies and workplaces may decide to offer them as an added benefit, and the schemes can be of particular interest to investors.
UK pension options for directors
Company directors are exempt from automatic enrolment. Nevertheless, if you are a company director, you can decide to opt into automatic enrolment if the earnings and age criteria outlined above apply.
Should your company only employ directors, your business can set up a new workplace pension and enrol its directors. The business can then claim tax relief not only on the contributions made as an individual but also on contributions made through the business.
Company directors can contribute up to £40,000 per year or 100% of their salaried earnings (dividends not included), whichever is lower, to a pension fund and still receive tax relief. The lifetime allowance for pension savings is £1,073,100.
Any type of pension contribution for company directors is tax efficient. Pension contributions count as business expenses and in addition to the 19% Corporation Tax relief on premiums, no employer NI contributions are due on any limited pension contributions made via a limited company.
In addition to the 19% Corporation Tax relief on premiums, there will also be no employer NI contributions on any limited pension contributions you make via your limited company.
Small Self Administered Schemes (SSAS) are suitable for the controlling directors of companies and operate as an occupational pension scheme offering its members flexibility and control over the investment policy and underlying assets.
The SSAS is a pension scheme set up under a trust with fewer than 12 members and overseen by the Pensions Regulator. SSAS pensions offer the same tax benefits as other occupational pension schemes, and most assets and investments within the scheme have no tax liability. SSAS can lend money to the employer provided the loan does not exceed 50% of the net value of the scheme’s assets, and they can borrow to invest or to pay a member’s benefits as long as borrowings do not exceed 50% of the scheme’s assets.
Executive Pension Plans (EPPs) are contribution plans provided by the employer and run by a life assurance company. Employees are not liable to income tax or National Insurance contributions (NICs) on payments made to an EPP.
UK pension options for the self-employed
The self-employed are entitled to the State Pension based on their National Insurance record. The self-employed are also eligible for the same tax breaks as employees if they contribute to a personal pension.
Setting up a personal pension as a self-employed person allows an individual to make contributions or ad hoc payments into a self-employed retirement. The provider will claim tax relief and add it to the pension pot.
Do you have questions about pensions for business? Any concerns about managing your pension requirements or those of your employees?
Have a look at our services and feel free to get in touch. You can book a consultation at info@acuaccounts.com or call us directly on 0203 907 9027
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