How To Utilise Company Pension Contributions As A Wealth And Financial Planning Tool
Posted on 23rd August 2023 at 12:30
An exploration into the tax relief advantages of executive pension plans for limited company directors. The approach discusses within the blog can be used to optimise year-end bonuses and reduce pension costs, with potential savings due to varying corporation tax rates.
There are very few tax relief schemes for limited companies that can generate personal wealth with low risk, but an executive pension plan is one of them.
A director of a limited company is able to receive company contributions directly into his pension pot. Further, the contribution is received pre-taxation i.e. there is no charge to company or employee national insurance contributions or personal taxation whilst the upside is that the payment is 100% deductible against corporation tax for the financial year in which the payment was made.
Personal contributions are limited to £60,000 per fiscal year with tax relief up to 100% of salary, however company contributions have no limits as long as the payment meets the HMRC “Wholly and exclusively test”.
These benefits make it a viable tax planning tool for both the director and the company and there is an argument that it is more advantageous than the NEST scheme.
Switched on directors are utilising the tax efficiency of these contributions to swallow up year-end bonuses or swap out personal contributions and gross up the company national insurance payments to receive an additional 13.8% into the pot for no additional cost to the company. Alternatively, the company could reduce its pension costs by 13.8% for the same director benefit.
The corporation tax relief is currently 19% for small (<£50,000 profits), 25% for large companies (>£250,000 profits) and the marginal rate in between is 26.5%. So, there’s a hefty saving to be made particularly if the contribution takes the tax rate down from the marginal rate and into the small company rate.Take a peak.
There are also benefits to using this tool for personal tax planning when selling shares in a limited company.
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