If your company accounting year end is approaching, you can potentially reduce Corporation tax liability, whilst also personally benefiting by making pension contributions, effectively reducing the company’s profits for that particular year.
From a company perspective, not only can these contributions be deducted for corporation tax purposes, but by not being paid like salary also does not give rise to an employer’s National Insurance charge.
Personally, these contributions are also not subject to income tax, or employee’s National Insurance contributions. Once contributions are invested within a pension fund they are also not subject to UK income tax or capital gains tax.
The personal tax advantages continue with up to up to 25% of the pension fund being able to be drawn as a lump sum to £268,275 or 25% of the value if lower*. The remainder of the fund can be used to provide you with a taxable income throughout your lifetime. Should you also pass away before age 75, the entire value of your pension fund can be paid as a lump sum, not be subject to inheritance tax or income tax. If death occurred after age 75 then the income, or lump sum, will be taxed as income at your beneficiaries’ highest rate.
*Please note if you have HMRC protections in place relating to the lifetime allowance, these figures could be different.
Beware however that if contribution levels are deemed ‘excessive and not wholly and exclusively for the purposes of the business’ HMRC could refuse these to be deducted against corporation tax. Although not common when a relatively modest contribution is paid for a director of a profitable business, you may wish to seek advice from your accountant on this matter.
Generally, if your total taxable income does not exceed £200,000, the maximum amount you can pay into a pension is £60,000 for the current tax year. This is the total amount in a tax year which you will get tax relief on 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 carry forward however it is advisable to seek financial advice on this matter.
The below table 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|
|Corporation tax on profit at 25%||(£15,600)||Nil|
|Total applied to your pension||Nil||£60,000|
*This assumes you are a higher rate tax payer in the 2023/24 tax year and the full £1,000 dividend allowance is available.
**Personal pension contributions are restricted to the lower of total earned income or £60,000.
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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