Kim Williams APFS
- Financial Planning Director and Financial Planner at Kreston Reeves Financial Planning Services Limited
- +44 (0)330 124 1399
- Email Kim[email protected]
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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:
*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.
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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