Twice the Tax Saving

Pensions have always been regarded as one of the most tax efficient ways of extracting profits from a business, but many entrepreneurs have avoided going down this route because of the perceived lack of flexibility in accessing the money once... Read more

Blog25th Aug 2014

By Sarah Munro

Pensions have always been regarded as one of the most tax efficient ways of extracting profits from a business, but many entrepreneurs have avoided going down this route because of the perceived lack of flexibility in accessing the money once it’s in the pension.

It’s true that there are many restrictions on accessing pension funds, the key one being that no access is permissible before age 55. However for funds that an individual is accumulating for the long term to provide an income in retirement, to pass on to family in the future, or to try and move out of the estate and avoid Inheritance tax, pensions can be a valuable tool. Aligned to these objectives is of course the ability to obtain a Corporation tax deduction in the company.

The changes announced in the 2014 budget have further improved the benefit of using pensions for profit extraction opening up to more people the ability to access their pension funds flexibly.

From April 2015 you will be able to access up to 100% of the funds accumulated in the pension fund at any time after age 55. The first 25% of the fund will be tax free and the remainder will be taxed at the individual’s highest rate of tax.

The caveat, therefore, is that although the pension will be more accessible, it will still require some financial planning to avoid paying top rates of Income Tax, and more importantly avoid running out of money. Still, for higher or additional rate tax payers, deferring income until after age 55 through a pension may enable them to significantly reduce the amount of tax they pay on their business profits whilst still retaining control of the funds in the future.

For more information contact Andrea Begg (andrea.begg@aab.co.uk)

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