Company Pension Contributions
Pension contributions are a tax efficient way of extracting profits from a company as long as immediate access to the funds is not a high priority.
Investing Your Company’s Retained Profits
Tax relief on pension contributions
Employer contributions to a registered pension scheme are normally deductible for corporation tax purposes, reducing the company’s taxable profits. Relief may be restricted if overall remuneration is deemed excessive for the work done. The contribution must be for the purposes of the business and normally needs to be paid within the accounting period in which relief is claimed.
Employer contributions are normally non-taxable for the employee, although they count towards your pension annual allowance. The standard allowance is £60,000, including contributions made by you and your employer. Unused allowance from the previous three tax years may also be available. A lower allowance can apply to high earners and people who have already flexibly accessed their pensions.
Pension fund growth is generally tax-free. 25% of the fund can normally be taken tax-free, subject to your available lump sum allowance, usually £268,275 across all your pensions. The remainder is generally taxable when drawn.
Company contributions do not qualify for a separate claim for personal higher-rate tax relief. That applies to personal contributions where full income tax relief has not already been given, and can be claimed through Self Assessment or directly from HMRC.
Pensions as part of your profit extraction plan
However, money paid into a pension fund cannot be accessed until the minimum pension access age is achieved.This is normally 55, rising to 57 from 6th April 2028, subject to exceptions. If immediate access to profits or greater flexibility over how the money is used is the goal, relying solely on pension contributions may not be the most appropriate option.
An effective profit extraction strategy may combine pension contributions alongside salary, dividends and other tax-planning methods to make the most of the reliefs available whilst at the same time, addressing your personal financial needs.
We can work out the tax cost of these options and how much you can pay into your pension without an annual allowance charge. The amount you contribute should also leave enough money for your day-to-day needs and the business.
Talk to us about making pension contributions from your company and how they could fit with your other income.
Get in touch to speak to an expert today
Get in touch today and speak to a member of the Tax Innovations team.
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