Health and Care update: Pension contributions

Published: Wednesday 27 October 2021

With corporation tax rates increasing to 25% in 2023, business owners have the opportunity to make more tax efficient contributions into their personal pension schemes.

The most common route for profit extraction by director/shareholders is via a mix of low salary and high dividends. If this is your method of profit extraction, are you also considering employer pension contributions?

Making employer pension contributions is likely to become more attractive, as the corporation tax savings will increase from 1 April 2013. For example, for most tax paying companies, making an employer pension contribution of £10,000 would currently save corporation tax of £1,900. If the contribution is made after 1 April 2013, this saving will increase to £2,500, possibly more if your company profits are in the bracket £50,000 - £250,000.

Subject to certain conditions, a company can make employer pension contributions and these are both deductible expenses for corporation tax purposes, as well as no national insurance or income tax liabilities arising on the contributions.

What is the catch?

Unlike salary and dividends, which are paid directly to you, money held in pensions cannot be accessed until you reach 55 (57 from 2028). Therefore, if you do not have an immediate need for the funds it could be a tax efficient route to extract profits from your company, with the options available to you when reaching retirement more flexible than ever. 

Since 2015, individuals have been able to keep the pension in their name (rather than buying an annuity, although this is still a possibility) and ‘drawdown’ on their monies to meet their income requirement. Further, 25% of the pension can usually be drawn tax free on retirement, with the remainder subject to income tax. This makes it possible to structure your income to meet your needs, and by keeping your pension invested, continue to benefit from potential market growth. 

Pensions are also a very efficient way of providing for future generations. Most pensions are usually outside of an individual’s estate, meaning they do not pay inheritance tax (IHT) on these monies. The tax treatment now usually depends on the age of the member at their death. If the individual dies under the age of 75, the benefits are completely free from tax when paid to their beneficiaries. If the individual dies over 75, the benefits are taxed at the beneficiary’s marginal rate.

This increased flexibility makes pensions a much more attractive method of extracting profit from companies. Everyone’s circumstances are different, meaning there is no ‘rule of thumb’ when looking at how best to extract profit from your business. By speaking to one of our advisers we can recommend the best strategy for you.

The contents of this article are for information purposes only and should not be considered advice. Should you wish to explore this further we recommend seeking advice from a regulated financial adviser. 

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Rachael Anstee
Rachael Anstee
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