You may need to act quickly if you are a Director and your company’s trading year is approaching.

Making a pension contribution before your company accounting year end can be one of the most effective ways to reduce company profits, and therefore corporation tax liability while also personally benefiting.

Due to the tax advantages afforded by company contributions made to a pension arrangement belonging to, and controlled by you:

• Company made contributions are usually deductible for corporation tax purposes
• Unlike salary payments the contributions do not give rise to an employer’s National Insurance charge
• The contributions do not give rise to a personal income tax charge, or employee’s National Insurance contributions, again unlike salary payments.
• UK income tax or capital gains tax are not subjected to investments within pension funds
• Up to 25% of your pension fund can be drawn as a lump sum up to £268,275 or 25% of the value if lower* – This is known as your Lump Sum Allowance (LSA). The remainder of the fund can be used to provide you with a taxable income throughout your lifetime.
• The value of your pension fund, up to your Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100*, can be paid as a lump sum and will not be subject to inheritance tax or income tax upon death before age 75
• If you die after age 75, the income or lump sum will be taxed as income at your beneficiaries’ highest rate.

*If you have HMRC protections in place relating to the lifetime allowance, please be aware these figures may differ

If deemed that the contributions were excessive and not wholly and exclusively for the purposes of the business it is possible HMRC could refuse the contributions to be deducted against corporation tax. Although unlikely when a relatively modest contribution is being paid for a director of a profitable business you may wish to seek advice from your accountant on this matter.

For the current 2024/2025 tax year the maximum amount you can pay into a pension is £60,000 providing your total taxable income does not exceed £200,000.  This is the total amount in a tax year for which you will get tax relief, if it is paid into your pension by you**, your employer, or somebody else.  It may be possible to save more into a pension using a method called carry forward, however, it is advisable to seek financial advice on this matter.

The table below illustrates just how much you could save by making a company pension contribution compared to paying yourself a dividend of the same amount:

 

	Dividend payment	Pension contribution
Gross Profit	£60,000	£60,000
Corporation tax on profit at 25%	(£15,000)	Nil
Dividend payment	£45,000	Nil
Income tax*	(£15,018.75)	Nil
Net dividend	£29,981.25	Nil
Total applied to your pension	Nil	£60,000

 

*This assumes you are a higher rate taxpayer in the 2024/25 tax year and the full £500 dividend allowance is available.

**Personal pension contributions are restricted to the lower of total earned income or £60,000.

 

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To discuss methods of tax methods extracting profits from your company or your retirement provisions with a Financial Planner, please contact us on 0330 320 9280, email info@cravenstreetwealth.com or complete our online enquiry form.

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.

You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.

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