Providing Independent Financial Advice In Lancashire

What’s the Minimum Number of Employees to Provide a Pension?

The simplest answer of all: One. As soon as you have one eligible employee, you have to enrol them into a pension scheme. This almost always includes paying employer contributions into their pensions – if they earn £6240 or more per annum, you must pay; below that threshold it’s optional.

Ideally, the pension should be set up before they first start working for you.

Which Employees Aren’t Eligible for Pensions?

The test for pension eligibility is a two step test, and employees must be enrolled in a pension scheme if they fit either criterion – they are only non-eligible if neither are true.

You must auto-enrol any employee between the age of 22 and 66 (the state pension age).

You also need to auto-enrol any employee earning more than £10,000 per year.

And if someone who isn’t automatically eligible asks to be put into a pension scheme, one must be set up by them.

What Do I Have to Do for Employees Outside the Pension Scheme?

As well as enrolling any ineligible employees who ask, it’s also your responsibility to monitor eligibility; keep track of their age and earnings, so that you won’t be caught out.

You should also inform any non-eligible employees, in writing, about when they will become eligible and what will happen when they do. This should be done within six weeks.

You will also need to carry out a declaration of compliance and submit this to the Pensions Regulator. They have a guide online for doing this, which can be found here at the time of writing.

Providing Independent Financial Advice In Lancashire

Talk to Me About Pension Tax Relief

Taxpayers earn relief on the tax that would have been owed for their pensions, with that money remaining in the pension scheme.

This tax relief is paid based on the highest rate of income tax paid. So if you’re a basic rate taxpayer, you receive 20% relief on your pension; higher-rate taxpayers can claim 40%, and additional-rate taxpayers can claim 45%.

There is a cap on this tax relief – the pension annual allowance. Currently this is £60,000 (or 100% of your income if you earn less than £60,000).

It’s worth remembering here (especially for company directors) that this allowance is calculated only on salary, not on dividends.

Should I Set Up a Pension Scheme as a Self-Employed Individual?

This isn’t a question a guide can fully answer. You’re not required to set one up; on the other hand, saving for retirement.

However, there are many different ways you could do this – including paying into a company pension set up while you were employed previously, setting up a company pension scheme for your own business (ready to expand once you have employees), or paying into some other long term investment.

We would recommend consulting a specialist advisor who can confirm what will work best for your specific circumstances in this case.

If you have any questions about company pension schemes or any other aspect of payroll, please do contact us for support.

Providing Independent Financial Advice In Lancashire

How Much Should You Pay Yourself?

As a sole trader, your financials are not distinct from your business’ financials. That’s the big lure of forming a limited company – financial liabilities from business don’t affect your personal finances and vice versa.

This doesn’t mean you can’t have one bank account for personal use and another for use as the business (and this is usually recommended – it helps keep records straight, provides a useful psychological divide between what you’ve paid yourself and what’s earmarked for business, and especially if your personal account is shared with a partner, it provides an extra level of control).

Any money you pay yourself from your business is referred to as a drawing. It should be paid from business profits, and you will need to keep a record of your drawings.

These records will be used on your self-assessment tax return, and they affect your income tax and National Insurance contributions. Drawings are not deductible – they aren’t classed as wages – so the amount of your drawings also affects tax for your business every year.

For this reason, you should never make a drawing large enough that the business doesn’t retain money for:

• Ongoing costs
• Other expenses
• Tax on profits payable

Providing Independent Financial Advice In Lancashire

When Should You Pay Yourself?

Drawings can be taken at any time, which is arguably one of the biggest advantages of them. However, many sole traders still try to stick to a regular date to take drawings. This isn’t just habit from days when they drew a salary; it means you’re checking once a month or so to see the state of your business, and many of your larger outgoings will go at the same time every month anyway – so having a drawing just beforehand means you’re always sure you’ll have the money for them.

Your tax obligations and efficiencies will vary from case to case, and specific industries may mean other regulations are in play. If you have any further questions, or especially if you would prefer professional support, please get in touch and we’ll be happy to help.