Making company contributions to the business owner’s private or company pension scheme can be a tax efficient way to extract further value from a business. However, certain annual limits apply to cap contribution levels.

Registered pension schemes

It’s important to consider the lifestyle that you want when you stop running your business. What level of comfort do you require? What value of assets do you need to accumulate and what level of income do you want?

These are important questions that deserve consideration as part of an overall strategy. Carrying out a full individual and corporate tax diagnostic is essential to ensure these issues are considered as a collective, e.g. building the value of your business, building your personal wealth, structuring all your affairs with long term goals in mind.

Here we are only focusing on pensions through the lens of maximising value that you can extract from your business.

Once you have established the amount you can extract from the business using the methods detailed above, you should then identify a surplus that can be used towards retirement provision.

Pensions can be a very tax efficient way to put money aside as you pay no income tax or National Insurance when the money is paid in (subject to the limits detailed below). You also get a Corporation Tax deduction on the money paid in.

Income or capital gains generated from funds or assets within the pension are not taxed.

The fund can be accessed tax efficiently from age 55.

On withdrawal, a lump sum of up to 25% of the fund can be accessed tax free. Withdrawal of the remainder is taxed but can be spread across multiple tax years, making the most of the personal allowances and tax rates.

How much can be paid in?

The maximum annual amount that can be contributed – with no income tax or National Insurance, but a full Corporation Tax deduction – is £40,000. The annual allowance applies across all pension schemes – it is not a ‘per scheme’ allowance.

If you earn over £240,000, you are likely to have a restricted annual allowance. The allowance is reduced by £1 for every £2 in annual earnings above this figure, with the minimum allowance set at £4,000. However, if you earn over £312,000, no annual allowance is available. You will be charged at your rate of tax for these pension contributions.

Where this maximum is unused in a particular tax year, the balance may be carried forward by up to three years and added to the annual allowance for the relevant year.

As an example, if you have not previously contributed, the business could put up to £160,000 as a one off contribution, receiving a full Corporation Tax deduction and with no income tax or National Insurance.

The amount you can pay in is not limited to what you earn – for example even if your salary is £8,840, the business could put £40,000 into your pension, or up to £160k if the ‘carry forward’ option is available. This is provided you were a member of a registered pension scheme in those previous years. If you contribute to your pension personally from your gross pay, your tax relief is limited to how much you earnt that particular year.

If you contribute in excess of your annual allowance or accumulated annual allowances if you are carrying them forward, you will trigger a tax charge called the annual allowance charge. It is added to your taxable income and taxed at your rate of tax (20, 40 or 45%). It is effectively reclaiming the tax benefit incurred on the excess contribution. If the charge is over £2k, you can speak to your pension provider to see if the pension can pay the charge from the fund. The company on the other hand is not subject to any penalties and can still claim a Corporation Tax deduction on the full amount.

32 Ways To Save Tax and Extract Maximum Value From Your Business

These tips are from our eBook, 32 Ways To Save Tax and Extract Maximum Value From Your Business. This guide explores 32 ways to ensure you’re maximising every opportunity you could be, to improve your life, your families and your employees.

Download 32 Ways To Save Tax and Extract Maximum Value From Your Business eBook.