You could be utilising Pension Tax Relief
People who are self-employed or own a business often forget to utilise pensions. This stems from a tendency to assume your business is your “retirement fund” and all that you need, but in reality you need more wealth channels than relying solely on the capital built up in your business.
Firstly, pensions are a tax efficient way of saving. For business owners, a pension is also a way of drawing capital out of the business tax efficiently. More importantly though, the value of your company is not set in stone, it is only worth what someone is willing to pay for it. If the capital you receive from a business sale falls short of what you need to retire comfortably on, having additional sources of retirement income could make up the difference. Ultimately, having your wealth split across different areas, such as your business, a pension, investments, equity in a house etc spreads risk and often increases your tax efficiency.
Pension contributions for the year need to be made by 5th April 2022. Sole traders can pay directly into their pension. If you run a limited company, you can pay into your pension through your monthly payroll or make lump sum contributions throughout the year. For 2021/2022, individuals have an annual pension allowance of £40,000 but more might be available if you have not used previous years allowances.
When it comes to pensions the government gives tax relief. If you are a basic rate taxpayer this will be 20%, which is added to your contributions by your pension provider. If you are an additional or higher rate taxpayer, you can claim your additional or higher rate tax relief back through your self-assessment tax return. Not many people know about a carry forward rule either. Over the last three years if you have not used your full £40,000 allowances you can carry these forward and make additional contributions over the pension tax free amount. In simple monetary terms what this means is that if you were topping up your pension with £1,000, it would cost a basic rate taxpayer £800 and higher rate taxpayer £600 after tax relief. If you aren’t utilising pensions as a way to save, why not find out more about business retirement planning.