Techzone

Running a successful business is hard work, so it’s understandable that most entrepreneurs are much more focussed on the here and now than planning for their retirement. But the run-up to tax year end is an opportune time to help clients step back from the day job and think about pension saving as part of their wider wealth and tax planning. And navigating the annual allowance rules is key to making the most of the available pension tax breaks.

Business fortunes fluctuate. This is where carry forward can come to the rescue. In more prosperous years, it allows clients to play 'catch-up' by paying in much larger contributions to compensate for underfunding in previous years when available funds were invested in their business. This not only boosts their retirement funds, but could also save them a lot of tax too.

And remember, this tax year is the last chance to benefit from the potential double annual allowance for 2015/16 before it drops off the carry forward radar: it’s a case of “use it don’t lose it” before 6 April 2019.

Some clients may see their business as their retirement fund, but not everyone will be able to rely on this; things may not work out as planned. Saving into a private pension alongside their business should prove a less risky strategy – and there’s no better time to have this conversation.

Why pay in?

Pensions remain the most efficient way to save for retirement and there are strong motivational reasons to do so. These five tips may help your clients get the most out of their pension funding.

• Reducing tax on profits
  Self-employed profits will be taxed when they are made. Unlike the director of a limited company, they cannot be sheltered in the business as undistributed profit, or used in a similar way as director loan accounts. In a good year, tax could be as high as 40% or even 45%. Paying larger amounts into a pension is one way of reducing the tax charged on profits at higher rates, and carry forward of unused annual allowances is a means of achieving this.
• Maximising relief at the highest rates
  Where self-employed profit projections are consistently over the higher rate threshold, it may be worth limiting funding so that higher rate relief is given on the whole contribution, particularly where the carry forward of unused relief can all be used in this way.
• Timing of contributions and relief
  Contributions can be made after the end of the business year to which they relate (but still in the same tax year), which means that profits should be known if the business year is not in line with the tax year. This gives some certainty over how much can be paid in to maximise tax relief. Contrast this to the director of a company, where an employer contribution must be made before the end of the business year to get relief in that year.
• Retirement certainty
  To provide a more stable income in retirement by carefully selecting funds that spread the investment risk, rather than relying on the notion that "my business is my pension". Can anyone accurately predict where their business will be, come retirement, and whether it has a commercial value and a willing buyer?
• Leaving a legacy
  A modern pension can provide a tax efficient inheritance for loved ones with easy access. Could this be said of a business, even if their partner and/or children did want to take it on as a going concern?

Guide your clients through the AA planning maze

The carry-forward rules offer a valuable planning opportunity to boost pension saving, and smooth over any gaps in previous funding, tax efficiently. But what are the potential traps and how can they be avoided?

1. Avoid tapered AA by contributing more

Using carry forward could be one way for some high income clients who would otherwise have a reduced allowance to retain their full £40,000 AA for 2018/19.

Clients with income over £150,000 could face a cut in the amount of tax-efficient pension saving they can enjoy. The standard £40,000 AA will be reduced by £1 for every £2 of 'income' clients have over £150,000 in the tax year, until their AA drops to £10,000.

However, the tapering of the AA won't normally apply if income less personal contributions is £110,000 or less. A large personal contribution using carry forward can bring income below £110,000 and restore the full £40,000 AA for 2018/19.

Personal contributions can help company directors retain their full AA too. But they can also use company contributions to navigate the AA tapering rules.

2. Fund before accessing flexibility

Triggering the money purchase annual allowance (MPAA) means future funding into DC pensions will be restricted to just £4,000 a year - with no carry forward.

Clients about to access their pension pot might want to consider a final funding boost first. Or think about using other savings, or only drawing tax free cash from the pension, to avoid triggering the MPAA and keep more options open for the future.

3. Last chance to benefit from the special AA rules for 2015/16

The move to align pension input periods (PIPs) with the tax year from April 2016 mean special AA rules applied for the 2015/16 tax year - giving a potential allowance of £80,000 for that year.

• All open (pre-Budget 2015) PIPs were closed on 8 July 2015 and counted against the 2015/16 AA. This PIP had an £80,000 AA.
• A new (post-Budget 2015) 2015/16 PIP ran from 9 July 2015 to 5 April 2016. This PIP had an AA of up to £40,000 (or the remainder of the £80,000 from the pre-Budget PIP, if less).

This means some clients could have up to £40,000 AA to carry forward from 2015/16 – even if they’d already paid £40,000 for that tax year. But remember it’s a case of “use it don’t lose it” before tax year end.

Summary

For many company directors and self-employed entrepreneurs, taking profits as a pension contribution could be a more efficient way of remunerating themselves and reducing their overall tax bill.

And remember additional and higher rate taxpayers may wish to contribute an amount to maximise tax relief at 40%*, 45%* or even 60%* (where personal allowance is reinstated) while they have the opportunity.

The ability to carry forward unused pension annual allowance means entrepreneurial clients can save more when business is good, without suffering an annual allowance tax charge. And why shouldn't they take advantage of this? After all, while they may be willing to accept risks while they're working and building up a business, they needn’t take risks with their retirement.

* Based on main UK tax rates, not Scotland.