Directors’ Pensions & Services
At Henson Crisp, we understand the importance and value of Directors’ Pensions & Services. We don’t just set up pensions for directors. We actively plan each year with our clients to ensure that their pension contributions align with their current earnings to ensure an optimum tax position.
Here are just three examples of how we can help:
Pension Contributions to Reclaim the Personal Allowance
Directors earning more than £100,000 start to see the tapering of their personal allowance. The personal allowance is the amount you can earn tax-free. This amount is £12,570 for the 2022/2023 tax year.
For every £2 you earn above £100,000, the personal allowance is reduced by £1, until at £125,000 p.a. you have no personal allowance and hence no tax-free amount. Effectively you pay 60% tax on earnings above £100,000.
By making a pension contribution however, you can reduce your tax liability by bringing your earnings below the £100,000 threshold. As a result, this will reduce your tax bill.
Use Pension Carry Forward to Increase Pension Contributions
HMRC allows you to use up to 3 years of unused contributions to boost your contributions above the £40,000 limit.
This means that if you are a director of a company and have not made any pension contributions in recent years, you can carry forward unused pension contributions from the previous 3 tax years to the current tax year.
Your company must have made at least as much profit in the current tax year as you wish to contribute. Therefore, you can contribute up to £160,000 (3 previous tax years plus the current tax year limit of £40,000), provided your company has made this amount of profit in the current tax year.
Relevant Life Plans
A Relevant Life Plan is a type of life insurance. A lump sum is paid if a director or employee of a small business dies or is diagnosed with a terminal illness.
It is paid by the company and is not a P11D charge on the individual.
Relevant Life Plans are written under trust which means they fall outside of the estate for IHT purposes. They can also be attractive for high-earning employees or directors who have substantial pension funds. This is because the benefits do not form part of their lifetime allowance.