Almost a year on since the start of the first lockdown and finally customer-facing businesses are gradually allowed to open again.
Certain businesses not relying on physical presence however remained trading and continued to support a diverse workforce. With the easing of the pandemic in sight and tax year end fast approaching now is the time to look at how best to utilise business profits for the future using pension provision.
Pension contributions through your limited company represent a practical as well as tax efficient way to save into the 'current account of the future', for you as well as your employees.
One of the reasons to consider pension contributions is the ability to reduce your business's taxable profits along with reducing Corporation Tax liability.
In practice, for every £1,000 profit, the corporation tax is currently £190, leaving a dividend of £810. By the same token, £1,000 put into your pension reduces your tax bill by £190.
Whilst dividends may seem at first, the obvious solution to invest in to a pension, they attract dividend tax (after paying corporation tax first) so this may not be the smartest solution to deal with company profits. In contrast company pension contributions can be utilised from pre-tax profits meaning that higher-rate taxpayer could benefit from 45% tax relief on said contributions.
For example, if Phil owns a chain of auctioneers, is a controlling director and also acts in an employee capacity of his limited company, then his pension contributions can be offset against corporation tax. In addition and unlike a salary, any such contributions are exempt from National Insurance of 13.8%. Therefore if he were to put money from his business directly into his pension pot he may be able to save almost 33% in comparison to him drawing a salary.
Mel, an auctioneer and who works for Phil can elect to use her annual bonus as a salary sacrifice in exchange for pension contributions, thereby either achieving a higher pension contribution for the same net cost or the same contribution at a lower net cost.
As you can see, no matter what business you run and in what capacity, the potential for securing a good financial future, in this case contributing to pensions, is always there.
The ground rules may be straightforward but the details surrounding tax rules and pension schemes can be complex and it is imperative that you seek Independent Financial Advice. If you would like to discuss any of the above please contact us for a no obligation discussion.
Silvia Johnson Bsc(Hons), DipPFS, EFA, CertCII (MP) is a Director and Independent Financial Adviser at Royale Thames Wealth and provides independent financial advice to individuals and businesses.
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Royale Thames Wealth Ltd is an Appointed Representative of New Leaf Distribution Ltd which is authorised and regulated by Financial Conduct Authority number 460421.The value of your investment may go up as well as down and the value is not guaranteed. Past performance is not a guarantee of future performance.Wills and Estate Planning are not regulated by the FCA