Time may be running out to reduce your Corporation Tax liability whilst also boosting retirement savings
If your company’s trading year will soon be at an end you need to act quickly to reduce the company’s Corporation tax liability.
One of the most effective ways to benefit personally from the Company’s profits and reduce the Corporation tax liability at the same time, is to make a company pension contribution. The pension contribution has to be made before your company accounting year end, in order to reduce your profits for that year.
The company contributions, once made, will be held in a pension arrangement belonging to and controlled by you. Company pension contributions are a particularly effective way of doing this, because of the tax advantages on offer:
- Contributions made by the company are usually deductible for corporation tax purposes.
- The contributions do not give rise to an employer’s National Insurance charge, unlike salary payments.
- The contributions do not give rise to a personal income tax charge or employee’s National Insurance contributions, unlike salary payments.
- Investments within pension funds are not subject to UK income tax or capital gains tax.
- 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*. The remainder of the fund can be used to provide you with a taxable income throughout your lifetime.
- On death before age 75, the entire value of your pension fund can be paid as a lump sum and will not be subject to inheritance tax or income tax. 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, these figures could be different.
It is possible that HMRC could refuse to allow the contributions to be deducted against corporation tax, if it concluded that the contributions were excessive and not wholly and exclusively for the purposes of the business. You may want to seek advice from your accountant on this matter however, it is particularly unlikely when a relatively modest contribution is being paid for a director of a profitable business.
You may be aware that the maximum amount you can pay into a pension is £60,000 for the current tax year as long as your total taxable income does not exceed £200,000. 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 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|
|Corporation tax on profit at 25%||(£15,600)||Nil|
|Total applied to your pension||Nil||£60,000|
**Personal pension contributions are restricted to the lower of total earned income or £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.
For advice around accumulating retirement savings please contact our Financial Planning team on +44 (0) 330 124 1399 or provide your details on 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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