Having your company top up your pension is one of the most tax-efficient ways to extract profits, yet many owner managers still default to taking a combination of salary and dividends. Are you ready to take your tax planning to the next level?
Tax-efficient pension contributions
For owner managers, pension contributions are especially powerful because you can benefit from both sides of the equation – the company position and your personal one.
When your company pays into your pension, the company usually gets corporation tax (CT) relief and there’s no costly employers’ NI. Employer pension contributions are not a taxable benefit in kind, so there are no adverse income tax or NI implications (subject to certain limits detailed below).
The icing on the cake is that investments within a pension can grow completely tax free. Thus you can extract value from your company to build personal wealth, without immediate tax charges.
CT relief
Company pension contributions must meet the “wholly and exclusively” test, meaning they are paid wholly and exclusively for the benefit of the company’s trade. For smaller, owner-managed businesses, HMRC will generally accept that pension contributions made to the owners meet this test, regardless of the practicalities (like frequency and size). As you control your own remuneration, pension contributions are simply another form of reward. Issues only tend to arise where contributions are unusually large or clearly out of step with the commercial position. Note for CT relief, timing does matter. Tax relief is generally given when the contribution is paid, not when it’s recorded in your accounts.
If you’re trying to reduce this year’s CT bill, make sure the pension contribution is physically paid before the year end.
A pension contribution also reduces profits which in turn could reduce the rate of CT.
Personal limits
To achieve tax efficiency you still need to be mindful of certain personal pension limits that apply for tax purposes. The main limit is the annual allowance, currently £60,000 (subject to tapering for high earners). Pension contributions above this level can result in an income tax charge.
You may be able to use unused carry forward annual allowances from the previous three tax years to make a larger contribution.
The downside is of course that once you’ve paid money into your pension, you can’t access it until you’re 55 (57 from April 2028).
Remuneration planning
As an owner manager, you can decide how and when to extract profits, and pension contributions should be part of that decision. A typical profit extraction strategy would be:
- a small salary for NI efficiency
- dividends up to your desired income level; and
- pension contributions for anything left over.
