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The aim of a directors pension is to build up a sum of money in a tax-efficient way that can then be used to provide you with an income when you retire as well as being a tax-wrapper that can be used to pass on wealth to loved ones on your passing.
You can usually take up to 25% of it as a tax-free lump sum when you take your benefits (depending on your pension scheme rules). The remainder of your benefits will be paid subject to income tax.
Using a pension scheme can be a far more sensible strategy than relying on your business to provide income to fund your retirement. You can receive tax relief at your highest rate on any personal contributions and your company contributions do not incur income tax or national insurance, unlike other benefits. A pension can be a way of extracting business profits in a tax-efficient manner; for the benefit of a director or business owner.
Your pension fund will grow free from most taxation, provide a tax-free lump sum and an income after that, once you decide to retire or take the benefits.
Employer contributions can be considered 'business expenses' and therefore deductable as an expense for the calculation of corporation tax.
Having a pension remains one of the most tax-efficient ways for business owners and company directors to accumulate wealth for retirement.
For many business owners, their business is their pension, which is why it is important to have an exit strategy in place when you retire.
As the rules currently stand you may be able to carry forward unused annual allowance from the previous three years. This will allow you to make one-off contribution to your pension.
The tax treatment is dependent on individual circumstances and may be subject to change in future.
Trusts and Tax Planning are not regulated by the Financial Conduct Authority.