Why business owners should pay close attention to their pensions before tax year end

Emma Rivers, Chartered Financial Planner at Evelyn Partners, the wealth manager, outlines why topping up a pension can be even more tax efficient for entrepreneurs 

The end of the tax year end is just days away and entrepreneurs and business owners who have not considered how to take advantage of this year’s reliefs and allowances could be missing out on opportunities to mitigate their tax liability – both for themselves and their business.   
 
Tax-year end planning involves reviewing your finances, identifying what opportunities there are for your earnings, income, savings and investments and then taking action before the financial year ends at midnight on April 5, 2025. While this is something all taxpayers should consider, for entrepreneurs, dealing with the challenges facing their business can take precedence, but their personal and business finances are often inextricably linked. 
 
A business that can be flying high one moment can be burning through cash and grappling with economic uncertainty and tax changes the next, which can leave the owner with some major personal decisions such as how to pay the mortgage or fund the children’s school fees. This is why keeping one eye on personal finances is imperative for entrepreneurs as it not only secures their long-term future but also provides them with a valuable safety net if their business interests experience a tight spot – and there can be some major tax advantages too. 

This tax year end has the added significance for entrepreneurs as it coincides with the month when rising employer National Insurance contributions (NICs) come into force, along with hikes to business rates and a significant increase in the minimum wage – raising costs for business owners up and down the country. 

With the tax-year end now imminent, Emma Rivers, Chartered Financial Planner at Evelyn Partners, says taking advantage of all the personal allowances available to an individual, as well as their spouse and children, such as ISAs, should be a standard part of tax year end planning for entrepreneurs, as it is for everyone else. But considering their pension options is particularly important for business owners as it can have benefits for both their business and their personal finances. Here, she outlines why: 

Boost your pension by taking advantage of your own salary sacrifice scheme 

For some entrepreneurs their business is their retirement plan, but successful exits are not guaranteed, so it is important that entrepreneurs don’t ignore the tax advantages that come with saving into a pension.  
 
Pension saving will not only supplement retirement income in the future, but it also mitigates income tax liability because any contributions usually attract tax relief at your marginal rate. In addition, all income or capital gains within a pension are tax-free but withdrawals outside the 25% tax-free amount are treated as taxable income. 
 
Pension saving is potentially even more advantageous for entrepreneurs than it is for employees, as it can be very tax efficient for owner managed businesses to manage their retirement savings via their company. This is because making pension contributions through the business can not only be tax deductible against corporation tax, but the business owner could also slash the National Insurance bill, both for themselves and their business by taking advantage of their own salary sacrifice scheme. 
 
From April 6, business owners that don’t have a salary sacrifice scheme in play could be shooting themselves in the foot. Not only would such a scheme make them, as an employer, seem more attractive to staff, but they could also reduce the company’s NI bill and their own at the same time. This is because as well as a reduction in income tax, salary sacrifice schemes also enable both employee and employer to pay lower NICs, which makes pension saving even more tax efficient – particularly for the business owner. 
 
If the business owner is a higher or additional rate taxpayer, making a pension contribution can be far more tax-efficient than taking a salary or retaining profit. This is because if they take a salary, that is still corporation tax deductible, but they will be liable for income tax, they have their own NI bill to consider and then, separately, as a business, the soon to be 15% NI bill as well.  
 
If they choose to take dividends instead, they are not only liable for 25% corporation tax but also 33.75% dividend tax (or 39.35% for an additional rate taxpayer) on that sum minus the meagre £500 dividend allowance, albeit there is no NI bill to pay. But with a pension contribution, this is not only tax deductible, giving them a 25% corporation tax saving but there is no dividend tax to pay or any NI for the individual or the business. 

Of course, it’s about finding the right balance between the money you need to pay for the lifestyle you are living today and how much you can put aside for the future. The big challenge with a pension is that you cannot access it until the age of 55, or 57, from 2028, so business owners must weigh up immediate needs against long-term security. 

Take advantage of carry forward rules to boost neglected pension savings 

When an entrepreneur is starting out, they may decide to take only a modest salary and forgo pension saving in favour of reinvesting capital to grow the business. But once a business is established and profitable, it is wise for a business owner to make up for lost ground.  

The longer money is contained within a pension, the longer it has to compound and grow in value free of tax. 

The amount that can be paid into a pension while benefitting from tax relief is capped by the saver’s Annual Allowance (AA) or 100% of their annual earnings. Some business owners will be entitled to the full AA of £60,000 but the highest earners (with ‘threshold income’ of over £200,000 and ‘adjusted income’ of over £260,000) will be subject to the tapered AA. This could bring their AA down to as little as £10,000 once adjusted earnings are £360,000 or higher. 

Whatever their AA, entrepreneurs can take advantage of carry forward rules – which mean that unused allowances from the previous three tax years are available once they have made full use of their current year’s allowance, as long as they had an active pension in place during those years. That means there is the potential to make a gross pension contribution of up to £200,000 before the end of this tax year on April 5 if they have not used any of their pension allowances from the previous three years. 

This can be particularly valuable for a business owner that has not managed to fund a pension in recent years, as it can be a tax efficient way to take money out of the business. Not using pension allowances or carry forward can mean lost opportunities and less corporation tax savings if cashflow is high. 

While a younger business owner may be more inclined to reinvest spare cash back into the business, older business owners, those post 50 and over, may view carry forward as a tax efficient way to take lump sums out of their business as they not only have the potential to boost neglected pension pots but they can also access the money again, if they need it, either immediately depending on their age or in the near term.