I was recently reading a piece in Lumin News about company profits and pension contributions. It reminded me of a conversation I think accountants should be having more often with owners of successful businesses.
The familiar question is, “How do I take money out of my company tax efficiently?” We look at salary, dividends and the director’s loan account. We calculate the tax. Those are necessary conversations, but I often want to ask something first:
Do you need to take all of that money out?
A profitable company needs cash to operate, pay its people, invest and withstand the unexpected. Its owners need income too. Once those needs are understood, there may be profits that could serve a longer-term purpose.
For some owner-managers, an employer pension contribution is one option. It allows the company to put money towards the owner’s retirement without first paying that amount to them as salary or dividends. Where the contribution qualifies for corporation tax relief, it can also reduce the company’s taxable profits. The tax position depends on the circumstances, and pension annual allowance rules must be considered.
But I would not start with the pension. I would start with the purpose of the money.
What does the business need to keep? What should it invest? Should it reduce debt? How much income does the owner need now? And how much of the owner’s future security depends on the value of this one company?
I have worked with entrepreneurs and owner-managed businesses for much of my professional life. One thing becomes clearer with time: building a successful company does not automatically mean building personal financial security. You can spend decades creating a profitable business and still find that much of your wealth is tied to it.
That is why retirement provision deserves a place in the wider discussion about company profits. It is part of deciding how the success you are building today can support the life you want later.
So perhaps the next question is not simply, “How much profit would you like to extract this year?”
Perhaps it is: “What are these profits ultimately for?”
If your company is profitable and you would like to review how you take money from it, speak to your ElanTax client manager. We can review the company and tax position with you and, where regulated pension or investment advice is needed, work alongside an appropriately authorised financial adviser.
This article is general information, not personal tax, pension or investment advice. Tax treatment depends on individual circumstances and may change.
