Using pensions for business growth

As I’m sure you have seen, in the latest budget announcement (March 2023) the annual pension allowance was increased from £40,000 per annum to £60,000 per annum, which is a great way of contributing more to your pension pot without incurring additional tax charges.

It is also worth noting that the Chancellor announced that the lifetime allowance for pensions will be abolished, albeit they will remain in place for the current tax year. The current lifetime allowance is £1,073,100 and whilst this potentially remains relevant for determining the maximum level of lump sum contributions, it should provide even more flexibility for future contributions.

You also have the ability to utilise unused allowances from the previous three years, which means that you could make a lump sum contribution of up to £180,000 in one year if you have not contributed at all within the last three years.

Not only are you building up your pension pot, but if you are making the contribution through your Limited Company, you are also saving corporation tax at 19%, 25% or 26.5%, which is better in your pension pot than in tax to HMRC!

So, whilst you can use your pension contribution to save corporation tax and build up your retirement fund, you can also use it for business planning and growth, which a lot of people are unaware of. Self-Invested Personal Pensions (SIPPs) are a great way of assisting with this.

What is a SIPP?

 A SIPP is a personal pension scheme that offers a more sophisticated range of investment options than the usual Standard or Stakeholder schemes. Yes, they are likely to attract higher annual charges for the management of these schemes, however the benefits of taking out a SIPP can far outweigh the conventional schemes.

For example: are you trading from premises that you are renting? Have your outgrown your current location but have limited working capital to consider moving? Does your current premises just not work for you anymore and is it now possibly detrimental to the growth of your business?

Did you know that your SIPP can be used to help purchase a commercial property?

Let’s say you have a pension pot of £500k, which you have been consistently contributing towards for your retirement but is now just sitting there earning minimal growth year-on-year. If you were to transition this pot into a SIPP (with the assistance of a Financial Adviser) it can then be used to  apply for a mortgage of up to 50% of the value of the pot. Which means that you could then have the capacity to purchase a commercial property for up to £750k.

Yur Limited Company would then trade from this site and pay monthly rent at a commercial value into the SIPP. The monthly rent cost would be deductible for corporation tax purposes, saving tax at a minimum of 19%, which would cover the monthly mortgage repayments in the SIPP as well as contribute towards the growth of the scheme and increase your retirement package when the time comes.

In this instance, using a SIPP to fund business growth could be seen as an ideal outcome for all parties: the company is now able to trade from a site that is fit for purpose, and you as the business owner can increase your pension pot each year by the rental premiums. Win win!

Not only that, but you now have various options regarding this property upon retirement, which can provide greater flexibility depending upon your circumstances at the time. One option might be to d continue to lease this to a third party and use the rent to fund your retirement or alternatively you could sell the property and crystallise the cash.

What if my Company already owns our business premises?

 If your trading premises is already owned by your limited company, this can still work for you. If you have a pension pot available, your SIPP can purchase the property from the Company in the same way as above. You also have the option to purchase a percentage of the property in a number of tranches if your pension pot isn’t big enough to complete this all at once.

Again, this transfer works effectively for both parties. The SIPP purchases a commercial property, or a percentage of ownership, with rental income being received each month to build this back up and the Company releases working capital from the sale of the property to invest in its future. You will, however, need to consider the Capital Gains implications of this sale, and record this on the Company Tax Return accordingly.

This option does become a little more complicated, but as with any of these options I would strongly advise you to seek advice before going ahead.

As business advisers, we have seen this approach work for a number of our clients but it’s not a one-size fits all approach. Each situation is different but there is likely to be a solution that works for all parties. Here at Scrutton Bland we have the in-house knowledge in all areas to advise on these transactions. We have Tax Advisers who can work through the Capital Gains Tax position, Business Advisers who can work with you to help ensure the transaction proceeds smoothly, and Insurance Brokers who can ensure the property is correctly insured.

If you would like to discuss this further, please do reach out to Emma at hello@scruttonbland.co.uk or phone her on 0330 058 6559.