Corporate Pension Planning

For the entrepreneurial company director or self-employed owner manager, Pannone Financial Services can provide advice on setting up small pension schemes to not only fund their own individual pension pot, but to also provide a flexible and tax efficient tool to assist in achieving business economic success.

Employer contributions to the scheme will reduce taxable profits and the funds within the scheme may be used in a variety of ways to assist the business. These include the ability to invest in the company via secured loans, or hold company shares. The scheme may also purchase the company premises to lease back to the company in order for the property to be held in a tax free environment (the rent paid to the scheme will further reduce taxable profits for the company). As the pension scheme can also borrow additional funds this can help provide further liquidity for the company.

With good planning advice the innovative entrepreneur can make the scheme work for their business by saving tax and providing additional finance, whilst building up a substantial pension fund to benefit them and their family in retirement.

At Pannone, we not only have extensive experience of undertaking corporate pension planning but also have the advantage of working alongside corporate and commercial property lawyers which can assist in property purchase within the scheme. We also have links to pension lawyers within the Connect2Law scheme which can assist in setting up appropriate and, if necessary, bespoke schemes.

Our financial advisers can also provide advice on other areas of corporate pension planning including:

• Helping larger employers ensure they meet their obligations under UK law in providing Stakeholder or Group Personal Pension Schemes to their employees. These can act as a legitimate business expense as well as a powerful recruitment tool
• Salary sacrifice arrangements where employees give up taxed salary in lieu of employer pension contributions that reduce taxable profits and employer National Insurance costs. These savings can then be shared between employer and employee
• Further to new legislation permitting the investment of SIP and SAYE share options schemes, into pension arrangements we can advise employees of the tax benefits and implications of such actions.

Call 0870 164 2372 now for a consultation with a Financial Services Advisor at Pannone LLP.

Case Study: Corporate Pension Planning for Buying a Commercial Property

This idea shows how a profitable small company can reduce its tax liabilities and build substantial retirement funds by using a Small Self-Administered Scheme (SSAS) to buy the premises from which the company trades.

Our case study looks at how a company with three directors and a year end profit before tax of £812,268 can buy commercial property valued at £587,500 (including VAT) tax-efficiently.

The company has three options:

• Buy the property from after tax profits
• Pay the directors bonuses so that they can buy the property
• Set up a SSAS for the three directors and the SSAS buys the property

This example demonstrates why buying commercial property through a pension scheme can be the most tax efficient method. The example shows how the scheme can be not only an effective retirement planning vehicle, but also a valuable corporate tool.

The company can buy the property

In order to raise the capital required to buy the property the company will have to use all of it's after tax profit and will incur a tax bill of £224,768.

The directors could buy the premises between them.

To finance the purchase, they each need a gross salary of £322,002.

A total income tax and national insurance liability for the company and the three directors is £500,217.

Rent received by the directors is subject to personal income tax.

The company needs to make a profit in excess of £1,000,000 to pay the salaries and national insurance contributions. The directors already know that the company year end gross profit will be £812,268, so this is not an option.

It may be possible to pay dividends rather than salaries. This option should always be considered as it can reduce the need to pay national insurance contributions. However, to pay dividends of £587,500 for the three directors the cost in tax for the company and three directors is £309,446.

In all of the above scenarios capital gains tax is payable when the property is sold.

The property can be purchased through a SSAS

A contribution of £587,500 is paid, generating corporation tax relief.

The rent paid by the company will receive corporation tax relief. There is no income tax to pay on the rent received by the pension scheme and no capital gains tax to pay when the property is sold.

Pension planning

A pension fund is created and the commercial property is bought as an investment of the scheme, using the initial contribution of £587,500. The projected fund of the SSAS over 15 years is £1,703,133. This is assuming no further contributions are paid; rent is received of £41,125 per annum (with no increases) and an average growth rate of 3% per annum.

As well as building up substantial retirement funds the directors can release some of the capital back into the company by making a loan-back.

Conclusion

By investing in commercial property through a pension scheme:

• The company reduces its corporation tax bill from £224,768 to £42,706
• The company still has £182,062 net profit available for investment
• A pension scheme is established for the three directors and an initial contribution paid of £195,834 each, which is within the 2007/08 annual allowance of £225,000
• The pension scheme purchases the property from which the company trades funded by the contribution
• The rent paid by the company to the pension scheme attracts corporation tax relief
• The rent received by the pension scheme will be free from income tax
• There will be no capital gains tax to pay when the property is sold by the pension scheme
• As the property is an asset of the pension scheme it is protected from company creditors
• Substantial funds can be built up for the three directors without the need for any further contributions
• There is scope for the pension scheme to invest capital back in the company through self-investment.

The information contained in this document is based on our understanding of current pension's law and taxation.

Calculations are based on tax and national insurance data for 2007/2008 tax year.

Pannone LLP is authorised and regulated by the Financial Services Authority.

Call 0870 164 2372 now to speak with an Independent Financial Adviser (IFA) at Pannone LLP.