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Profit extraction via Pension in owner managed businesses

A similar option to savings via pension is savings via ISA after profit extraction through dividends.

Main advantage of pension option:

  1. Pension withdrawals can be timed.
  2. Pension investment growth is gross which is c30% higher than in ISA option.
  3. First 25% of pension pot can be withdrawn tax-free.

How does this work in practice?

An individual can be a member of as many pension schemes as he/she likes. Thus, a director should continue making contributions in the auto enrolment pension of the company either via relief at source or net pay arrangement.

Besides the above, director can open a low-cost Self invested Pension Plan (SIPP) via pension providers like AJ Bell or Vanguard etc. Where employer company can directly make payments to the pension provider. Ensure payment are directly made from the employer company to the Pension provider and not via the employee.

Hiring an advisor – In case you are lucky enough to have built up substantial funds in your pension pot, you may think about hiring an Independent Financial advisor, main points to remember are:

  1. Be clear about their charges
  2. Agree an investment performance criteria; and
  3. Lastly, monitor the above two points regularly like annually.


Bonus material

One risk with pensions is financial irregularity in the pension company.

Annuity payments are made till purchaser is alive.

SIPP belongs to the employee. He can take it with him when he leaves the employment, or the company closes down.

Pension age since April 2015 is 55 years increasing to 57 years from 2028 then will increase in line with state pension age.

Withdrawals – after reaching pension age, whole 100% of pension fund can be withdraw. But first 25% is tax free balance is taxable.

Acknowledgement: Rayney’s Tax Planning for Family and Owner-Managed Companies

Directors and PAYE

1.0 Basics

• Directors are employees.

• It is not necessary for Directors to be paid National living/minimum wage.
see HMRC Tax Bulletin 50 with examples and ICAEW Tax guide 07/00.

• Directors usually register for Self-assessment (SA). They will need to complete employment pages of the return.

• Two methods for computing National Insurance Contributions (NICs) for directors:

a) Cumulative ; or

b) Regular employee method

Please note both method give similar results at the end of the tax year.

1.1 Bonus facts

• Directors can register for `Annual Scheme` who are paid on an annual basis to avoid sending (Employee Payment Summary) EPSs every month.

• Dividends can only be paid when there are sufficient profits made in the business this could be current year profits or brought forward reserves.

• NIC is not due on Dividends.

• Record keeping: PAYE records needs to be kept for 3 years.

• Its advisable to keep records for 7 years.

2.0 Paying directors without running payroll
We can put up till £123 (LEL : tax year 24-25) x 52 = £6,396 as director’s wages.

For tax year 2025-26 ; as ST is lower than LEL we can only put £96 x 52 = £4,992 as director’s wages without running a payroll.

See link below:
https://www.gov.uk/paye-for-employers

3.0 Optimum salary for directors
For tax year 2026-27 salaries till personal allowance are still the optimum level with or without avaliability of employment allowance.

4.0 Minimum Salary for State Pension
Any individual (including a director) earning between LEL and PT a week, is treated as having been paid the contributions to protect your National Insurance record.

  • Employee starts paying NIC on salaries over PT and
  • Employer starts paying NIC on salaries over ST

See link below:
https://www.gov.uk/national-insurance

4.1 Directors staring during the year

Paying a salary at a rate at least equal to the LEL (£6,500 per year for tax year 2025-26 ) allows the individual to receive a National Insurance (NI) credit for the year, making the year a qualifying year for state pension purposes. Example an individual starting in December, paid monthly, needs to be paid £6,500 /4 = £1,625 per month. It is important to note that although definition of qualifying year refers to weekly amount, earnings are looked from annual perspective. Also note, pay in each pay period should be over the LEL otherwise that pay period is treated as `zero`.
Source: ICAEW guidance and 14.2 National Insurance Contributions by Karen Speight

5.0 Method of payment of directors salaries
Usually Director’s salary is credited in their account via a Journal entry. This is alright when Director Loan Account is in Credit. In case Director Loan Account is in debit i.e. monies have already been withdrawn, it would be necessary to actually pay the salary, which director could transfer back to the company.

6.0 Interest on directors loans
If a director has given loan to his company and charges interest on it, this interest income will be covered by Personal savings allowance.

7.0 Auto enrollment
a) As per Pension regulator “organisation with one or more directors who do not have contracts of employment is not an employer if it does not have any staff other than the director(s).

The company will have no automatic enrolment duties and does not need to complete a declaration of compliance. In this case they should let pension regulator know that they’re not an employer.”

b) Employer can pay full 8% contribution; as per gov.uk .

See link below:
Pension Regulator website

8.0 Starting PAYE during the tax year 

Please see our note on related blog.

Foreign capital losses

What are the rules for setting off foreign capital losses.

Foreign capital losses

A loss accruing to a person in a tax year in which they were non-resident it is not an allowable loss. TCGA 1992 sec 1E subsection (1)

In a split year this rule applies to the overseas part. TCGA 1992 sec 1G subsection (2)

Exception to the above rule is disposal of UK Land (direct or indirect) or UK assets held for the purpose of a UK trade. TCGA 1992 sec 1A subsection (3)


Example

Say, Pavel is a long-term resident of India and moved to the UK in 2022. He is an active investor in Indian stock market. He made capital losses in year 2021 but when he became UK tax resident in tax year 2022, he made capital gains in India. His position is summarized below:

Tax yearResident status in UKResident status in IndiaCapital Gain/Loss
2021Non-residentResidentLoss
2022ResidentNon-residentGain


From UK tax perspective, as Pavel made capital loss in India in 2021 when he was a non-resident in the UK, he cannot set them off against capital gains made in India in tax year 2022.

Note: Rules may differ for remittance basis users and temporary non-residents.

Bonus
Usually, capital gains can be transferred among spouses e.g. before disposing off an equity shares husband can transfer part of them to wife to take advantage of two capital annual allowances. Unfortunately, Capital losses cannot be transferred i.e. capital gains of one spouse cannot be offset against the capital losses of the other.

For further reading, visit our Worldwide Disclosure blog.

TDS on NRO deposits in India

UK residents needs to restrict Indian banks to deduct TDS at 15%

Usually Indian bank deduct c31% as tax on the interest they pay on NRO deposits – savings bank or fixed deposits.

A UK resident can use double taxation avoidance agreement between India and UK to restrict Indian banks to deduct TDS at 15% (treaty rate).

Usually, Bank ask for Form 10F and a self-declaration (sample forms).

Please be aware, India UK DTAA restricts FTCR at 15% for interest income even if tax suffered is higher i.e. c31% in this case.

Incase UK resident has deposits in other countries, similar forms will be required. Please check with you bank. Treaty rates for different countries can be access via DTAA digest.

This exercise is only worth if taxpayer has material deposits.

Bonus material

You may find another blog post on similar topic useful – UK resident earning overseas interest income from India

For further reading, visit our Worldwide Disclosure blog.

Small companies , which documents I have to file and where ?

Small companies have to file documents at two places :

1 – Companies house ; and

2 – HMRC

Companies house: two documents

1 – Annual accounts  – Companies house does not charge for filing this document.

2 – Annual return – Companies house charges a single annual charge, information can be updated for free throughout the year by filing further confirmation statements during the payment period.

HMRC: two document

1 – Companies Tax return

2 – Owner tax return

Bonus Material

Group Accounts – A company is exempt from the requirement to prepare group accounts if at the end of the financial year, the company is subject to the small companies regime. source Companies Act 2006 Section 399