Tax-efficient
retirement planning
36 Employers’
pension
contributions save NICs. If your
employer pays you salary or
bonus which you then invest
in your pension, both you
and the employer have to
pay NICs. But if your employer pays
contributions directly into your pension
scheme, the employer gets the tax relief
and there are no NICs to pay – saving the
employer’s NIC of 12.8% and your NICs as well.
You could arrange with your employer to cover the cost
of the contributions by reducing your salary or not
taking a bonus you are due. But HMRC is very particular
about how this should be done to be tax-effective.
37 Make
large pension contributions. There is an annual
allowance of £215,000 in 2006/07, the maximum
total pension contribution normally qualifying for tax
relief for an individual. You and your employer between
you can contribute up to this amount, but you personally
cannot contribute more than 100% of your earnings for
the year. Even if you have no earnings, you can benefit
from tax relief on gross contributions of £3,600
in any tax year.
38 Do
not exceed the annual and lifetime pension allowances.
The penalties can be very expensive. For example,
when the capital value of your pension benefits exceeds
the lifetime allowance (this year £1.5m), the
effective tax charge will be 55%. If the value of your
pension fund already exceeds the lifetime allowance
you can ask for that value to be protected, but you
will need advice about how to do this.
39 You
are now allowed to draw income from your pension scheme
while you are still earning. You do not have
to stop work and formally ‘retire’ to draw
your occupational pension from age 55 onwards. You can
carry on working – perhaps part-time – take
some of your pension benefits to boost your income,
and contribute to the same or a different pension scheme
until you reach 75.
40 Arrange
for your company to buy your shares to help solve your
business succession problem. When you retire
from your own company, you would probably like cash
in return for your shares, but your younger colleagues
may not have the resources to buy you out. One solution
is for the company itself to buy your shares and then
cancel them, leaving the remaining shareholders controlling
the company. You would end up with the cash on which
the capital gain should be taxed at no more than 10%.
Of course, it all needs careful negotiation with HMRC
to avoid the payment being treated as income and taxed
at 25%.
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