How to reduce your Company’s tax liability? The answer is Invest in Pensions
On 3 March, the Chancellor announced his plans to increase corporation tax from 19% to 25% for some businesses from 2023. 2020-21 Deadline 31st March 2021
Pension contributions are one of the most efficient tax breaks available to limited companies. It makes sense to take advantage of this tax break for you, as a company director, and your employees.
By law, you already need to contribute certain amounts into your employee’s pension fund as part of the government’s Auto-enrolment arrangements. However, there are good reasons why you might want to contribute more than the minimum amount.
Making pension contributions through your limited company?
Paying pension contributions is tax-efficient because you’ll reduce your company’s taxable profits and therefore your Corporation Tax liability. Making the contribution through your limited company is usually more tax-efficient than making the contribution from your own funds.
How much tax can I save on pension contributions?
For the 2021/22 and the 2020/21 tax years, the Corporation The tax rate is 19%. So, for every £1000 your company earns a profit, you’ll pay Corporation Tax of £190, reducing the amount you can take from your company as a Dividend to £810. Paying £1000 into an employee’s pension fund effectively costs the company only £810 due to the reduction in Corporation Tax payable.
When can I start withdrawing from my pension fund?
Once the invested in your pension you won’t normally be able to access it until you’re at least 55 (rising to 57 in 2028). You’ll usually be able to take up to 25% tax-free, with the rest taxed as income. As the budget has shown, tax rules can change, and benefits will depend on personal circumstances.
How much can I contribute to my employee’s pension scheme?
You can pay into your employee’s pension scheme, subject to HMRC’s contribution limits and rules. Your contributions will be tax-free as long as they do not exceed the annual allowance, which is currently capped at £40,000 (for 2021/22 and 2020/21 tax years). The amount that you pay must not exceed your company’s income for the year as this could raise questions from HM Revenue and Customs as to whether the amount has actually come from your company’s trading.
If you have a large amount that you would like to put into your employee pension scheme, then you may be able to take advantage of the carry-forward rule. This allows you to make use of annual allowances that have not been used in the previous three years, provided that the employee was a member of a registered pension scheme. If you would like to carry forward, you must first use your full annual allowance for the current tax year before using any unused allowances from the previous three years.
Pension Lifetime Allowance?
You should also consider your lifetime allowance, which is a limit on the amount that can be withdrawn from your pension scheme through either lump sums, or through retirement income, without incurring extra tax. The lifetime allowance is currently £1,073,000 in both 2021/22 and 2020/21 tax years.
Saving Employer National Insurance?
Another benefit of paying through the company is that employers aren’t required to pay National Insurance Contributions (NIC) on pension contributions. If you consider that the NIC rate for 2020/21 is 13.8%, you could save up to that amount by paying into a pension instead of taking the equivalent as salary.
Oasis Wealth Management
Pension, Investment & Mortgage Adviser
Due to the complex nature of pension schemes, we strongly recommend you take specialist advice from our financial advisor before making any contributions to an employee pension scheme (including your own).
Oasis Accountants cannot provide such advice, but we have Investments, Pensions & Mortgages services within our Group companies.
Oasis Wealth Management team, who can help you with this type of specialized financial advice and even offer a 30min free Consultation. Please book.