Small Businesses

Taxation information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. It should also be noted that tax advice which contains no investment element is not regulated by the Financial Conduct Authority.

Pensions are a very tax efficient way of extracting value from all the hard work that you have put into growing your business.

Sole Traders

The government gives you tax relief at your marginal rate. You can invest up to the amount of your taxable income. However, pension contributions are most tax efficient when they help bring your income tax level down to the basic rate.

The pension grows tax free and when you come to enjoy the benefits you can take out 25% tax free and then pay tax at your marginal rate on the remaining fund. If your marginal rate when you come to retire is 20% then you can effectively remove the value from your company at a combined rate of only 15%.


A pension contribution will normally pass the 'wholly and exclusively' test and therefore no corporation tax will be due. If you have had an open pension for the last 4 years you can use carry forward and invest a maximum of £40,000 x 4 = £160,000.

Holding surplus cash in reserves is a waste. It is possible to invest the cash into cautious investments to at least compensate for the ravages of inflation. It should be noted that there is corporate rate tax to pay on any growth.

Please note that most advice on auto-enrolment, occupational pensions and workplace pensions is not regulated by the Financial Conduct Authority but by The Pensions Regulator.

What is Automatic Enrolment?

The government has introduced a new law designed to help people save more for their retirement. It requires all employers to enrol eligible workers into a workplace pension scheme if they are not already in one. Automatic enrolment started being phased in from October 2012 and will be fully rolled out by 2018.

Most employers will have to set up and contribute to a pension scheme suitable for automatic enrolment. It is essential to start planning early and research suggests an ideal timeframe of 6-12 months before your 'Staging Date'.

Know your staging date

The staging date is a key piece of information when planning ahead for automatic enrolment. An employer's staging date is determined by the number of persons in the largest PAYE scheme that they use, based on the latest data from HMRC held by The Pensions Regulator on 1st April 2012.

Understand your workforce

You will need to understand the different types of workers and what defines them, as well as the corresponding employer duties for each type of worker. Some types of contracts will require close examination to identify where the employer duties lie e.g. for agency workers or contractors.

Business software and systems processes

Many of the functions necessary to comply with automatic enrolment duties are process-driven. Business software (e.g. payroll, HR and pensions administration) should be set up to automate the majority of these processes, such as monitoring ages and earnings of workers and deducting pension contributions.

Review pension arrangements

You may have existing pension schemes you want to use for automatic enrolment. These schemes will need to meet certain criteria, which could involve changing the scheme rules or terms and conditions. You'll need to understand how the new legislation fits with existing pension arrangements, such as salary exchange or contractual enrolment.


There is a range of information that you are required to provide to your workers, such as providing them with financial information about the contributions that they and you may be making towards their pension. Some information must be sent individually to each worker as well as making sure the right person gets the right information at the right time (e.g. if they change worker category).


There are certain employer duties you must comply with. If you fail to comply with your duties or miss your staging date, The Pensions Regulator may take enforcement action and issue a notice and or a penalty.


You are required to register with The Pensions Regulator to inform them what you have done to comply with their automatic enrolment duties. The duty to register lies with the employer and needs to be completed within the five months following your staging date.

For further information visit The Pensions Regulator website.

Entrepreneurs' relief (ER) provides relief for disposals by smaller business owners. It results in a tax rate of 10% rather than 20% on the disposal.

The relief is available on material disposals of business assets which covers businesses operated as a sole trader, partnership or through a limited company. There is also a form of relief for businesses owned within a trust, by reference to the beneficiaries of the trust, although this will not increase the amount of relief available over and above that for an individual owner.

The maximum gain to which relief can apply is a lifetime limit of £10 million. The lifetime limit works so that an individual making a number of disposals of businesses during his lifetime may exceed the limit. The value of the relief is therefore £10 million x 10% (the maximum reduction in tax) = £1,000,000. This should be borne in mind when considering appropriate planning steps, as they may have negative consequences on ER.

It should also be noted that holding non trading assets e.g. cash above 20% of the value of the company may not be eligible for ER.

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