Hi, it’s Nishi here. What I want to talk about today is how you can save money by putting money into a pension. And then I’m going to just in general talk about whether or not you should or shouldn’t do that. Just before I go into this, I go to our website and accounting.
co. uk, we’ve got some really good quality content on there, which will help you grow and scale your own business. We’ve got more of these videos. We got our podcast, we got our webinar, we got our guide, we have got our blog and we’ve got information about our quarterly planning days so it’s definitely worth checking out.
Okay back to this video, this is quite a tough decision to make sometimes for business owners about how much money to actually contribute to their pension. Let’s talk about the benefits, when you contribute money into your pension via your business, the business gets to treat it as an expense so it saves corporation tax.
And then you’ve essentially moved money out of your business into a personal asset so you haven’t paid dividend tax on it either. That’s quite a good thing. But what I just want to do in today’s video as well, I want to talk about some of the cons about it as well. Then at least if you’re watching this you can make more of a balanced opinion because I think…
I know lots of great financial advisors, but they tend to be one sided about this. So I want to, I just want to make sure we’re talking about both sides of the discussion. So just remember, yeah, corporation tax saving, dividend tax saving, amazing. Also just bear in mind, when you, do you want to take money out of your pension when you retire?
Or before then, if you’re still working at 55, but when you turn 55, you can start taking money out of your pension and you can get a quarter of that money you’ve put away in your pension as a tax free lump sum. You’re getting tax relief when you put money into the pension, but also you’re getting a good amount of tax relief when you take money out of your pension when you retire or at the age of 55.
There are some advantages in there and they can, using pension wisely, especially if you’ve got loads of excess funds, can really help you lower your tax bill. But let’s talk about the cons. Okay I mentioned you’ve got to be 55 to take money out of your pension. Let’s say you start throwing money into your pension right now and you’re a long way off retiring or being 55, you might come to the then one of the challenges is you’re tying up money that you can’t easily get to again, like you can get to money if you put it in a pension, but the tax rates on that are then eye watering and you wouldn’t want to do it unless you absolutely had to.
But the point being though is ultimately, you’re… By putting money into a pension, you are tying it all up for a very long time. And that’s something that you’ve really got to factor in because if you’re trying to grow and scale your business and your business needs cash to operate and to grow, then by putting into a pension, fine, you might get growth for that pension fund.
Even better, if you use a pension fund to then go and buy a commercial property which you can lend to your business or to rent out. Then that pension fund can also generate revenue through commercial lettings, essentially. Or or letting you use your, use a premises that you bought through your pension fund.
So that can be quite a pro, but the main part of it is a lot of the time if you’re scaling a business, you’re probably going to be quite hungry for cash. So putting money into pension, yeah, fine. You do get the tax savings, but the other side is just remember, and this is one reason why you might want to just make sure you’ve got a pension a pension scheme in place in your business, even if you’re not using it.
But as long as you’ve got a pension scheme in place in your business, then your pension allowances, because you can put 40, it’s gone up to 60, 000, you can put 60, 000 pounds into your pension every single year, but you can go back three years as well if you didn’t use your allowances as long as you had that pension fund in place.
So the idea is even, let’s say your business can’t necessarily afford it today, down the line it might be able to afford more. So actually at that point it could be at that point it could make sense to use up all those allowances you didn’t use in previous years. So you’ve got to make sure you ring fence those allowances by setting up that pension scheme.
They don’t necessarily cost a lot. You could just use the nest scheme, for example. But the point being though is there, there’s definitely pros and cons. Locking money away is not always the ideal scenario. Your only objective is just for those tax savings because you might find being cash strapped in a business means you won’t grow as fast and actually the return you get from the money you put in the pension will be much lower than the return you could have got from growing and scaling a business.
Definitely worth thinking about. And that’s the key thing. I guess it’s quite a simple one. Yeah, tax savings on one side, but also locking away cash which you probably need on the other. That’s definitely worth thinking about. It’s not always appropriate to put money into a pension. But sometimes it is, and that’s when you’ve got to talk to your accountant.
That’s when you’ve really got to think about your own cash flows. And then you’ve also got to have a good financial advisor that will give you a balanced view on it as well. That comes, it concludes this video anyway, but just remember, if you find any of the topics I’m talking about useful, or you’ve got more questions about them, all you have to do is go to our website and accounting.
co. uk and book yourself in for a free call. And we can talk about what they mean to your own business.