Case Study
Director Pension Contributions
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Client Scenario
John, Tim, and Martin are equal shareholders and directors of Barnet Builders Limited.
The directors draw enough income to meet their living expenses, while controlling their income tax liabilities.
This has led to the company building up significant cash reserves from retained profit.
The directors wish to move some of their surplus cash from the business into personal ownership.
They do not want to increase their personal tax burden, and are seeking ways to take ownership of these funds in a tax-efficient manner
In our initial meeting with the directors of Barnet Builders we identified that while none of them need immediate access to additional cash from the business, they felt that it was prudent to move some of their retained profit out of the company, to protect the funds from any unforeseen circumstances.
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All three directors have been contributing to the company’s workplace pension scheme, but as most of their income is derived from dividends, their pensionable salaries are low. We have calculated that each director has contributed £1,000 per annum to the group scheme over the last few years.
After completing a risk profiling exercise, we identified that John and Tim have a risk profile of balanced, and Martin has a risk profile of adventurous.
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The Solution
We recommended that each director make the maximum pension contribution available.
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This equated to a contribution of £176,000 each, amounting to a total of £528,000 moved from the business.
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As pension contributions are an allowable business expense, this resulted in a reduction in corporation tax of £132,000 for the year in which the contributions were made.
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The contributions were invested into new Self-Invested Personal Pensions (SIPPs), in investment portfolios which match each director's attitude to risk.
Conclusion
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As well as being a highly tax-efficient way of moving funds from company to personal ownership, our recommendation will also enable each of the directors to build a considerable retirement fund.
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