Limited companies and Corporation Tax breaks: Part 1 - Building a pension pot
One of the advantages of running your own limited company is the number of Corporation Tax breaks you can get. The problem is that most of us are too busy running a business to put the necessary time and research into working out what we should be doing, let alone how we should be doing it.
Which is exactly why we’ve done the work for you. In this new series of articles, we will be looking at the easy things you can do to reduce your Corporation Tax liabilities. And based on feedback from our clients across Aylesbury, Tring and High Wycombe, we will be focusing on the more unusual Corporation Tax breaks – after all, most of you will know that taking salary plus dividends will help reduce your personal tax rates, but did you know you’re entitled to a £150 party allowance for you, your employees and all their partners!
But before we get to the fun stuff, let’s start with one of the most tax efficient ways you can extract money from your company and minimise your Corporation Tax – build up a pension pot.
If you are looking for a great way of getting money out of your company and want to benefit from a hefty Corporation Tax break at the same time, then we suggest you start making pension fund contributions. Why? Because pension contributions are treated as an allowable small business expense and are offset against your company’s Corporation Tax.
You can make pension contributions in one of two ways:
• make a personal contribution
• make contributions through your company.
Both have advantages, but the best option will depend on you and your individual circumstances.
Making personal pension contributions
If you decide to make pension contributions from your personal funds, then the amount you invest will attract personal tax relief. This means that the pension provider will top up your contributions by 20%. So, if you want to £100 to go into the pension scheme, you will only need to pay in £80.
If you fall into different tax brackets i.e. you pay 40% or 45% income tax, then you entitled to higher rate tax relief on any personal pension payments. Currently, these are 40% and 45% respectively.
Making pension contributions directly from your limited company
Few people realise it is much more tax efficient to make pension contributions through their company. This is because, unlike personal pension contributions, the amount invested directly from your company isn’t linked to what you earn as a salary. This means it isn’t subject to personal tax, and as it’s an allowable small business expense, it isn’t subject to corporation tax either. In addition, employers don’t have to pay National Insurance on pension contributions, which means your company has just saved another 13.8% by paying into your pension pot rather than paying you the money as salary.
How much can you pay in?
There is no limit to the amount you can pay into your pension pot, but there are limits to the amount you can contribute and still receive tax relief. Currently, the annual allowance is 100% of your income (salary and bonuses), up to a maximum of £40,000.
Making use of unused annual allowances
If you are a member of a registered pension scheme and haven’t used your annual allowance during the three previous tax years, then you can take advantage of carry forward. This allows you to make extra contributions in the current year. So, if you earn £40,000 and only paid £15,000 into your pension pot last year, you can carry forward £25,000 and pay in a total of £65,000 this year. This is particularly useful if you are self-employed and your earnings change significantly every year.
When can you access your pension?
You can draw funds from your pension when you reach 55 and you don’t even need to retire to do it! At this point you will be able to take up to 25% as tax-free cash. The remainder can be used to provide you with a regular income and won’t be subject to National Insurance but will be subject to income tax.
Need more help?
Corporate and personal tax rates change on a regular basis and how to get the best pension contributions tax relief will depend largely on your individual circumstances.
We are more than happy to talk through your personal situation and help you work out the best option for you.
So, if you are interested in finding out more and are looking for accountants in Aylesbury or Tring, please get in touch.
Next time, we will look at how your company can become your own landlord.
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