Robert, aged 47, is the sole director and shareholder of XYZ Ltd. XYZ Ltd remunerate Robert with a PAYE salary of ยฃ12,500, and dividends of ยฃ100,000. In the financial year ending 30/11/2022, XYZ Ltd has profit of ยฃ200,000 and a cash balance of ยฃ250,000. As the companyโs overheads are low comparative to turnover, XYZ Ltd tends to accrue cash within the business that is not earmarked for business expenses.
Robert would like to exit the business at age 57 to enjoy a long retirement and, to date, has not made pension contributions to achieve this objective. He does have an old workplace pension that has not been contributed to since he left his employed role and set up the business in March 2015.
In his own words, Robert has โbasic investment knowledgeโ and some previous investment experience with shares he owns, which are a relatively low percentage of his overall wealth. As it is very important to Robert that he exits the business at 57, he would like advice regarding the investment strategy of his pension and a regular review to ensure risks are mitigated and opportunities are taken over the next 10 years. He would also like advice to continue into retirement, as he does not want to spend time worrying about the suitability of his investments.
To start accumulating savings and achieve his objective, Robert is happy to invest ยฃ100,000 from the cash held within XYZ Ltd. Robertโs pension annual allowance is ยฃ60,000 for the current tax year 2023/24. However, as he has an existing pension, and he is currently making no pension contributions and has not contributed in any of the three previous tax years he can carry forward his unused annual allowances for these tax years. Therefore, his total annual allowance, including carry forward, is ยฃ180,000. This is made up of the following:
- 2022/23 annual allowance = ยฃ60,000
- 2021/22 annual allowance = ยฃ40,000 (carry forward)
- 2020/21 annual allowance = ยฃ40,000 (carry forward)
- 2019/20 annual allowance = ยฃ40,000 (carry forward)
- Total = ยฃ180,000
(for the purposes of this case study, we have assumed Robert had not been subject to the tapered annual allowance in any of the previous tax years, which would otherwise have to be taken into account).
By making an employer pension contribution of ยฃ100,000, the profit in the current financial year will be reduced from ยฃ200,000 to ยฃ100,000, saving the company ยฃ19,000 in corporation tax due (corporation tax is at 19% for the tax year 2023/2024, as the profits are below ยฃ250,000, for businesses with profits over ยฃ250,000 the rate of Corporation tax is 25% for this tax year)
If you would like to review your carry forward position and understand how this could help you achieve your future aims, please get in touch to arrange an initial consultation.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment, retirement, or taxation strategy, you should seek independent financial advice before embarking on any course of action.
A pension is a long-term investment, the fund value can go down as well as up and this can impact the level of pension benefits available.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.
The Financial Conduct Authority does not regulate taxation advice.
