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FAQ’s

The quick answer

Pension payments are normally tax deductible, so it is a very good way of saving for the future and reducing your tax bill.

If you are employed, self-employed or salaried director owning your own company and have sufficient earnings you can pay all of your income up to £40,000 a year into your pension and it is tax deductible.

In more detail

You can also use the previous two years unused pension allowance so you could pay in £120,000 if you have had the income and not made any other pension contribution in the last three years.
If your income goes above £240,000 a year, then the amount you can pay in is restricted to just £4,000 per year. This reduction starts at income of £150,000 per year on a sliding scale up to income of £240,000.

There is also a lifetime fund allowance. Your pension fund in 2021/22 can not be worth more than £1,073,100. If it goes above this level the fund will be taxed.

Both a wife and husband have the annual pension allowance and fund value.

Many business owners set up their pension in a SIPP or SSAS so they can have more control over the investments including buying commercial property.

The answer is yes. You can sell a trading limited company, a partnership or a sole trade to an Employee Ownership Trust.

There are many advantages to selling your business to an Employee Ownership Trust. These include:

  1. You are not dealing with an independent buyer who will probably try and chip the price at the last moment or try and not pay all the instalments due on a deferred sale.
  2. You can set the price – at market value. It must be independently valued.
  3. The share sale, if over 51% of the shares is Capital Gains Tax free. This is an incredible way to save tax on sale.
  4. It is good for your employees to own the business. There is less absenteeism and more engagement.
  5. You can stay as a shareholder and as an employee/director on a market salary.
  6. It is good for firms that have a steady and strong fixed asset base but do not have a high multiple of earnings to value goodwill.

The main disadvantages are:

  1. The buying Employee Trust may have to pay for the shares by instalments over a number of years – usually 5 to 7 years. These repayments are funded from future profits so there is a risk.
  2. You may not achieve the best free market sale price.
  3. You may need to keep an involvement to pass on your management expertise.

Here are some other key matters to consider with an Employee Ownership Trust:

  • You do not need to sell all your shares – just above 51%.
  • You will need to create an Employee Trust document setting out the rules. We can do this for you and produce all the EOT documentation needed.
  • New employees can be made to wait for a probationary period before they share in profits.
  • Employees who leave do not get a capital payment or a right to keep the shares. Their share stays in the Trust for all remaining employees.
  • Employees can be paid a profit share tax free of up to £3,600 a year each.

If you would like to find out more about Employee Trusts, please contact David Kirk.

Like most company directors who are owners of your own company you are more likely to take most of your income as dividends than salary. This is because it saves National Insurance.

What gets confusing is how much money you should put aside from the dividends to cover the tax – as the tax is not due until later after the tax year end.

Dividend income gets taxed based on the total you receive in the year to the 5th April. This isn’t helped by the fact that tax is not paid monthly but effectively in three instalments over a 12-month period before and after the tax year end.

As an example, let’s say this is the year to 5th April 2022. The tax is due as a 50% estimate on account on 31st January 2022 and then another 50% is due on the 31st July 2022 with a final payment (or refund) on the following 31st January 2023.

Also, on the 31st January 2023 you are making the next 50% payment on account – it gets very confusing as to what you are paying for what period.

The best thing you can do is use the table below and set up a deposit account (ideally call it a ‘tax deposit account’ if the bank will let you) and keep this money separate from all your other money – so you know it is there to pay your tax and not yours to spend.

Annual dividends Monthly equivalent dividend Monthly tax to put aside
£40,000 £3,333 £163.44
£45,000 £3,750 £194.68
£50,000 £4,166 £301.97
£60,000 £5,000 £572.81
£70,000 £5,833 £843.64
£80,000 £6,666 £1,114.48
£90,000 £7,500 £1,385.31
£100,000 £8,333 £1,656.14
£120,000 £10,000 £2,468.64
£150,000 £12,500 £3,331.25
£180,000 £15,000 £4,283.75
£240,000 £20,000 £6,188.75

So if you take dividends totalling £50,000 per year, equivalent to £4,166 a month then you need to put aside £301.97 per month to cover the eventual tax due.

The above figures assume no other annual income and the final amount due will depend on all your circumstances.

If you would like to find out more, please contact me. David@kirkhills.co.uk or telephone 01392 494904.