News and Views

Pension rules impact successful small business owners


There has been a great deal in the news recently about pensions, and specifically about how changes to pensions rules are impacting on certain individuals’ ability to save for their retirement.

Doctors and other high income employees who have final salary pension schemes and who therefore aren’t in control of the amount being contributed into their pensions have made headlines as many are facing large tax bills following the introduction of the tapered annual allowance in 2016. For more on this and to determine if this impacts you, please consult HMRC’s guidance on pension rules, or as always feel free to contact us directly.

What pension rules have changed?

Up until 2011 an individual could contribute a little in excess of £250,000 per annum into their pension. This has since reduced to an annual limit of £40,000 for most people, but for higher earners this reduces still further once you are earning in excess of £150,000, tapering down to a maximum contribution level of £10,000 per annum for the highest earners.

Why is this a problem for successful small business owners in particular?

Particularly badly affected are business owners, be they sole traders or company directors, whose income can be unpredictable and who don’t have the benefit of someone else contributing to a pension scheme on their behalf.

We have a lot of company directors running very successful, profitable small businesses, and as a matter of best practice, we undertake a year end tax planning meeting with the business owners. Some years profitability and future growth plans mean that the owners have little left over to invest in their pensions, while in other years, they are making significant profit and maximising their pension contributions is a sensible way to save for their retirement while simultaneously reducing their corporation tax liability.

So just when you are in a position to be able to save significant sums for your retirement, the ability to do so is dramatically reduced – it hardly seems fair.

And to add insult to injury, if you do accidentally happen to contribute more than you should in any one year, you may be liable for a rather large tax bill the following year!

Tax planning is a complex area, and pension contributions are just one area to consider, so if you would like to understand more about this, then please don’t hesitate to get in touch – we are always happy to help.


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