Pensions for owner-managers

Why this one sits with the accountant

Pension decisions for an owner-manager are taken inside the remuneration conversation your firm is already having. The choice between salary, dividend and employer pension contribution is made at the same meeting, usually by the same two people, and only one of the three options tends to get a proper look.

You do not need to advise on pensions. You need to know enough to notice when the answer the client has settled on is worse than the alternatives, and to say so.

The mechanics worth carrying in your head

• Employer contributions. Paid by the company, normally deductible for corporation tax where they meet the wholly and exclusively test, with no national insurance and no income tax charge on the individual at the point of payment.
• The annual allowance. A cap on what can go in each tax year with tax relief. It is tapered for higher earners, and the taper catches people who do not think of themselves as high earners in a year with a bonus or a large dividend.
• Carry forward. Unused annual allowance from the three previous tax years can normally be used, provided the individual was a member of a registered scheme in those years. The oldest year drops off each April, so it is genuinely use-it-or-lose-it.
• Access age. The earliest age at which benefits can normally be taken is rising. A client approaching it is at the point where their options change, which is a natural moment for a review.
• Unused funds from April 2027. Unused pension funds and death benefits are expected to come within the estate for inheritance tax. Plans built on the assumption that a pension sits outside the estate need revisiting before then.

Rates, allowances and the taper thresholds change, so check the current year’s figures before relying on any of them. What does not change is the shape of the decision.

The remuneration conversation, done properly

The annual decision about how an owner takes money out of their company is a three-way choice, and most firms present it as a two-way one because the third option needs somebody else in the room.

• Salary. Deductible for the company, subject to income tax and both classes of national insurance, and it maintains the national insurance record.
• Dividend. Paid from post-tax profit, no national insurance, taxed at dividend rates, and requires distributable reserves.
• Employer pension contribution. Normally deductible for the company where the wholly and exclusively test is met, no national insurance, no income tax at the point of payment, and inaccessible until the minimum access age.

The third option is not better than the others. It is a different trade: a lower tax cost in exchange for giving up access for a period. Whether that trade is right depends on the client’s age, their other resources and what they need the money for, which is precisely why it needs an adviser rather than a spreadsheet.

Where the traps are

• The taper catching someone unexpectedly. A year with a large dividend or a property disposal can pull a client into the tapered annual allowance without anybody noticing until the return is prepared.
• Carry forward expiring quietly. The oldest of the three carried-forward years drops away each April whether or not anybody looked at it, and there is no way to recover it afterwards.
• Membership in the earlier years. Carry forward normally requires scheme membership in the years being carried forward, which catches clients who only started a pension recently.
• Assuming the pension sits outside the estate. With unused funds expected to come within the estate for inheritance tax from April 2027, plans built on the old assumption need looking at before then rather than after.
• The wholly and exclusively test. A contribution wildly out of proportion to the work the individual actually does for the company invites a challenge to the deduction.

What to look for in the file

• A profitable company making no employer pension contributions at all.
• A director drawing the same salary and dividend they took five years ago while profit has doubled.
• A client approaching the minimum access age, or approaching state pension age, with no review recorded.
• Several old workplace schemes mentioned in passing and never looked at.
• A sale on the horizon, where funding has to happen while the company is still trading.

What you can say

Wording you can use“The company is comfortably profitable and there has been no pension contribution for a few years. Employer contributions are one of the three ways of getting money out, and it is the one that rarely gets looked at properly. Would you like me to introduce you to somebody who can work out whether it should be part of the mix?”

Describing the existence of the option is fine. Telling the client how much to contribute, into what, or whether to consolidate old schemes is regulated advice and must go to the adviser.

When to raise it, and with whom

The natural moments are the remuneration discussion, the approach of a birthday that changes the client’s options, and the point at which a sale becomes a real possibility.

The clients most worth raising it with are not the wealthiest on your list. They are the ones with a profitable company, no meaningful pension and fifteen or fewer working years left, because that combination is where the difference between doing something and doing nothing is largest and the time to correct it is shortest.

One thing to avoid

Old workplace schemes are the area where well-meant help does the most damage. Consolidating them can be sensible and can also lose guarantees that are worth considerably more than the charge saving. Never suggest a transfer, even informally, and never help a client compare two schemes. Both are regulated activities, and one of them is among the most heavily scrutinised areas in the market.