Case Studies

Case Study 2 - SSAS Corporation Tax Planning

This case study uses an idea perfectly suited to a company director who is close to retirement but has not made serious pension provision. It achieves the following :

• Increase the value extracted from a company's profits.
• Reduce a company's corporation tax bill.
• Increase the funds available for company investment.
• Generate a pension scheme valued at more than twice its cost to the company.

An entrepreneurial director of one of our clients who is the driving force behind a successful company making significant profits of £210,000 this year approached us for some planning ideas. The director, who is aged 55, draws a gross salary of £83,000 per annum, which equates to a take-home pay of £54,940, after income tax and national insurance is paid.

Gross annual salary	£ 83,000
Less tax	£ 23,826
Less national insurance	£ 4,234
Net income	£ 54,940

Our aim was to maintain a steady income for the director and to start to fund for a pension, in a scheme which will hold assets for use by the business.

Income planning

The director's salary was reduced to £4,940, which incurs no tax. The company paid £200,000 into a Small Self-Administered Scheme (SSAS). The SSAS trustees immediately provided the director with a 25% tax-free lump sum (pension commencement lump sum) , bringing income for the year back to £54,940

Salary/Scheme Benefits
	Annual
Gross salary	£ 4,940
Tax-free lump sum benefit	£ 50,000
Less tax	£ 0
Less national insurance	£ 0
Net salary	£ 54,940

Pension planning

The contribution was paid into a SSAS and after the immediate payment of 25% of the fund to the director, the remaining £150,000 iwas retained in the fund to provide pension benefits in the future.

Funds within the pension scheme can be used to invest in the company. A loan of 50% of the net value of the scheme's assets was then made to the business.

Contribution	£ 200,000
Tax-free cash paid	£ 50,000
Pension fund	£ 150,000
Scheme loan to company	£ 75,000

The figures look good. The level of the director's pay was maintained and the pension scheme has funds valued at £150,000 but how was the company's finance affected?

Business financial planning

If the business continues to amass profits then the director's salary, employer's national insurance and corporation tax will reduce the funds in the company to £72,975.

By making the pension contribution and reorganising salary, the company's retained profit was reduced to £2,960. There was no corporation tax or national insurance to pay and the funds available to the company for investment were increased by £4,985.

	Not using a SSAS	Using a SSAS
Pension contributions	N/A	£ 200,000
Profit	£210,000	£ 10,000
Corporation tax	£ 44,100	£ 2,100
Salary	£ 83,000	£ 4,940
National insurance	£ 9,925	£ 0
Retained profit	£ 72,975	£ 2,960
SSAS loan to company	N/A	£ 75,000
Funds available for company investment	£ 72,975	£ 77,960

Conclusion

By investing in a SSAS:

• the company had £2,100 corporation tax to pay and no national insurance liability in respect of the director, a saving of £51,925;
• the level of the director's income was maintained at £54,940 p.a.;
• the director paid no income tax or national insurance contributions, saving £28,060;
• a pension fund of £150,000 was created;
• the company's profit was reduced by £67,915 but this was also the net cost of the £150,000 pension fund;
• the funds available to the company for investment were increased by £4,985 to £77,960.

Provided that the company's profits allow, this process can be repeated each year until the director leaves service, reducing the overall tax and national insurance liability of the company and the director whilst retaining the director's net take-home pay and building a substantial pension fund.

Technical Notes

The overall maximum loan to the principal or any participating employer is 50% of the net assets of the scheme, valued at the date of the loan, subject to:

• secured with a first charge on assets of adequate value;
• maximum term of five years;
• minimum interest rate of 1% above the average base lending rate of the 6 leading high street banks;
• repayment of capital and interest in equal instalments over the period of the loan;
• one missed annual payment may be rolled over once.

Loans may also be made to third parties but it is not possible to make loans to the member trustees or anyone connected to them. This means that a SSAS established by a self-employed business owner or partnership may not lend money back to their business.

Schemes that breach the investment rules, make payments to members, or pass assets to members or connected parties outside of the new rules, will be subject to a tax charge or penalties or both.

We believe the above case study is not caught by the legislation under the heading "Recycling of Lump Sums". It is important that advice is sought and obtained on the specific circumstances before embarking on any tax planning concerning the use of pensions.

The information contained in this document is based on Avidity Wealth Management Ltd. understanding of current pensions law and taxation.