Pensions are tax efficient investment vehicles that are chiefly designed to provide financial security in retirement. They can be used in a variety of ways and have specific benefits for business owners. However, deciding how and when to top up your pension can be difficult as a business owner. I have included some of the factors to consider when making contributions.

Allowances and Carry Forward

The annual allowance for the 2023/24 tax year is £60,000. Your business can contribute up to this amount, as unlike personal pension contributions, employer pension contributions aren’t limited to relevant UK earnings. If you haven’t made full use of your annual allowance in previous three tax years you may be able to contribute more than £60,000 by carrying forward unused allowances. However, if your personal income exceeds £200,000 you may be impacted by the tapered annual allowance, and your annual allowance could be as little as £10,000 for the year.

Access

It’s important to note that you won’t be able to access your pension until minimum pension age, currently age 55, increasing to 57 from 2028. If all your savings are placed into your pension, you may tie yourself up financially. If you do plan to stop working before pension access age, you need to find a balance between accessibility and tax efficiency. You also need to retain an emergency fund or save towards shorter term investment goals out with your pension in the interim.

Tax Relief

Employer pensions contributions made from your business are generally seen as allowable expenses and are therefore deductible for corporation tax purposes. HM Revenue & Customs need to deem the contributions as exclusively for business purposes. If tax relief does apply, pensions are a really tax efficient way to extract wealth from your business, as contributions are not taxable and are free from employee and employer National Insurance. You save both corporation tax and income tax by contributing through your limited company which compares favourably when compared to taking dividends or salary and then investing.

Mortgage Affordability

Mortgage providers generally consider your total personal income in conjunction with the net profit of the business. A pension contribution will reduce profit and may affect how much you can personally borrow. This will depend on the lender’s criteria. If you are up against the limits of mortgage affordability, a large pension contribution might not make sense.

* Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

* A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

* Workplace Pensions are regulated by The Pensions Regulator.