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Don’t let the demands of A-Day distract you from the pension planning opportunities presented by the end of the tax year. St James’s Place Capital head of pensions Ian Price offers some tips for keeping schemes well funded.

Time is not standing still in the pension world and we all have to get to grips with the changes which will be taking place on A-Day but we must be careful not to focus all our time and effort on next year’s changes, forgetting all the great business opportunities which exist now with the end of the tax year fast approaching.

Stakeholder pensionsFrom April 2005, with the Government’s consent, many stakeholder providers will be increasing charges by 0.5 per cent to 1.5 per cent for new schemes.

Employers looking to establish group stakeholder schemes will be able to benefit from a 1 per cent rather than a 1.5 per cent charge for their employees if they act quickly. Of course, for schemes already established with a 1 per cent charge, this will remain until eternity for new and existing members. If you are talking to any employer, why not mention that stakeholder charges will be going up? Act now to guarantee cheaper charges.

An interesting fact from the Pensions Commission’s report is that only 65 per cent of companies with between five and 12 employees have nominated a stakeholder scheme. What has happened to the other 35 per cent? Do you look after any of these companies? It is unlawful for them not to nominate a stakeholder provider.

Company year-endsAround 40 per cent of limited companies have their tax year-end on March 31 and there are some excellent opportunities to reduce their liability to corporation tax by making a significant pension contribution now.

Ask three simple questions. Will the company have a corporation tax liability? Are the directors contributing enough to retire on maximum benefits? Will A-Day cause the directors a problem with their pension funding?

Answering these questions will give advisers the opportunity to sit down with the directors to talk about making extra contributions before the end of March.

If the company has a corporation tax liability, then paying contributions will reduce this. Most directors are not funding for maximum benefits so a single contribution can normally be paid to get them closer to Inland Revenue limits.

If the director will be affected by the A-Day limits, then paying an extra contribution now could well help from the point of view of enhanced and primary protection.

Linked to this are changes announced in last year’s Budget where significant changes to the taxation of dividends for smaller companies came into force in 2004/05.

In recent years, many smaller limited companies have been established to take advantage of the 0 per cent starting rate of corporation tax, with the keyperson drawing 10,000 as dividends in preference to salary. The 2004 Budget radically altered this position and now makes pension contributions more attractive.

Scenarios for smaller limited companiesWhere small limited companies have in the past elected to declare 10,000 of dividends, with no tax to pay, the following examples indicate the various options now available and the implications of these alternatives on their effective tax rate.1. The same dividend is declared10,000 is still taken as dividends. There is now a new tax at 19 per cent = 1,900.

Effective tax rate = 19 per cent.2. All salary10,000 is taken as salary, assuming no other income.

Tax to pay: 4,745 @ 0% = 02,020 @ 10% = 2023,235 @ 22% = 711.70Employer NIC = 674.30Employee NIC = 579.48= 2,167.48

Effective tax rate = 21.7 per cent.3. Salary and pension6,400 is taken as a nominal salary along with a 3,600 pension contribution.

Tax to pay: 4,745 @ 0% = 01,655 @ 10% = 165.50Employer NIC = 213.50Employee NIC = 183.48= 562.48

A 3,600 pension contribution made by the employer will attract 684 corporation tax at 19 per cent, which more than compensates for the tax on the nominal salary. So, 562.48 tax to pay minus 684 tax relief to the employer = a contribution of 121.52 from the taxman.

Effective tax rate = -1.2%.4. Become self-employed without a pension10,000 is taken as earnings.

Tax to pay, assuming no other income: 4,745 @ 0% = 02,020 @ 10% = 2023,235 @ 22% = 711.70Class 2 NIC = 106.60= 1,020.30

Effective tax rate = 10.2%.5. Become self-employed and pay pension7,192 is taken as earnings with a 2,808 pension contribution.

Tax to pay: 4,745 @ 0% = 02,020 @ 10% = 202427 @ 22% = 93.94Class 2 NIC = 106.60= 402.54

A 2,808 pension contribution grossed up to 3,600 = 792 tax relief up front. So, 402.54 in tax to pay -792 tax relief = 389.46 from the taxman.

Effective tax rate = -3.9%.

Talking to clients about restructuring the business to become self-employed would certainly be worthwhile, bearing in mind all the other issues surrounding a change in status such as state benefit entitlement, income protection and so on.

These are just a few ideas which might help you to write extra pension business between now and the tax year-end.It is easy to forget simple ideas, when in many cases they are still as valid as they were a number of years ago.


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