Should I set up a company pension scheme for myself?

MoneyBob

Hi, new to the forums here. Have been trying without success to find answers online, and from IFAs.

I am the managing director of a limited company which employs only myself and my wife. I own 9/10 shares, she owns 1/10.

We pay ourselves the maximum pre-tax limit (£7440) each in wages every year, and the rest in dividends.

We have no pensions set up other than a small NFU one my wife has but which we do not pay into at present. It is sitting at about £7k. I'm slightly concerned about this when I get my sensible head on as I'm 41 with no pension, and a 1 year old daughter. My wife is 31.

We rent out our house because we live most of the time on a boat, but the rent only just covers the mortgage interest, letting agent, and maintenance. House value is about £135k. Mortgage remaining is about £95k. We own the boat outright with no mortgage - it's worth about £60k.

For the first time the company is starting to make more money than we can earn in dividends without us moving into the next (42.5%) tax bracket. We do not need that money for 'existing' so wondering about options.

If we leave it in the company I could invest it in a bond of some
sort, for a bad year perhaps, but I'd be paying 20% tax on the
"profit" the company made.

I believe if I pay the extra into a pension scheme that will not be
taxed _at all_ I believe (?) but I will not be able to touch that money until I retire.

My mortgage interest is about £400 a month at the moment so another option would be to pay myself every penny I can, and take the 42.5% tax on the chin, and pay off as much mortgage as possible as quickly as possible because £400 a month in interest adds up to quite a bit really.

It's difficult at this point to precisely calculate how much excess money from the business there is likely to be, but it's perhaps only going to be something like £10k a year at the current earn rate.

What should I do? How does someone set up a "pension scheme" for their own business? Is that the best way forwards for me?

Thanks for any advice.

davec1960

This is an area where you would be best talking to a professional, can your accountant help?

Couple of points that may help

Tax on dividends is 32.5% when you move into the higher rate band not 42.5%
eg Dividend declared of £900 per share ie £1000 gross
Tax to be paid is £325 (32.5%)
Tax credit of 10% is appled leaving £225 to be paid
The quick calculation is that 25% of any declared dividend is the amount of tax to be paid.

Your current shareholding structure doesn't utilise your wifes tax allowance efficiently unless she has another source of income. It is worth considering a change to the holdings if she doesn't.

You can access the pension fund before state retirement age, currently the age is 55 but could change in the future. Possibly useful if you have plans to retire early.

Pension payments reduce company profits, hence reducing corporation tax due. Don't let the tax tail wag the dog though.

Does your company rent premises?
If so a SIPP (Self Invested Personal Pension) can hold property and receive rent. This property could be rented out to your company and receive rent that is currently paid to a landlord. This not something anyone should leap into and requires specialist advice.

Are there any expenses that you could be claiming back from the company for personal expenditure?
eg when I started my company I didn't initially claim mileage back when I visited customers and suppliers and used my own car. My accountant quickly advised me to do so as I could claim back 40p (now 45p) per mile for the first 10,000 mile pa.

Paying down your mortage quickly is usually a good idea as you are getting a nett savings rate equivalent to your mortgae rate, howwever I don't know a lot about BTL, but I am not sure paying down the mortgage is a good idea as I thought that the interest was offset against rental income when working out income tax due.