Many small company owners would rather leave cash within their company than withdraw it and pay higher personal tax and NICs.
If a cash retention policy is followed for some years the resulting reserves could potentially threaten the company’s “trading” status needed to qualify for entrepreneurs’ relief or business property relief. HMRC consider the long term retention of surplus funds to be an investment activity if those funds have not been preserved for a particular trading purpose. Also the cash reserves are unlikely to be generating much interest in a corporate deposit account.

One of the most tax efficient ways of extracting funds from an owner-managed company is for the employer to pay a pension contribution into the director’s pension fund. This is tax deductible for the company, as long as the director’s total remuneration package, including the pension contribution, is reasonable for the work done by the director. The contribution also escapes both employers’ and employee’s NICs.

In the past individuals may not have been keen to lock their savings away in a pension fund, with the prospect of having to purchase an annuity to access 75% of the fund. Now the requirement to purchase an annuity has been withdrawn partially from 27 March 2014, and fully from 6 April 2015, pension savings are much more attractive.

The annual allowance was reduced to £40,000 on 6 April 2014, but unused allowance from the three previous tax years can boost that limit to £190,000. HMRC has recently revised its online pension savings calculators to help taxpayers work out how much annual allowance they have available.

HMRC has also provided detailed guidance for individuals who may have been caught out by the surprise announcements on pensions flexibility in the March 2014 Budget. Those who had only just taken a lump sum or bought an annuity may have been within the cooling off period to cancel that contract. Also small pension rights of under £30,000, or annuities of under £10,000 can fall within the new flexible rules.