Can you use pensions to save corporation tax?
If you are a director of your own company it’s worth considering if you can use pensions to reduce corporation tax. One key area to think about is your director pension contributions, as these can be offset against your taxable profits. Pension contributions for directors of up to £40k per annum can be deducted from your taxable profits. With a tax saving of between 19% and 25% of your pension contribution, this could potentially save you between £7,600 and £10,000 per company director – a nice helping hand if you’re aiming to cut your tax costs.
How do I offset my pension contributions?
Like any expense, to be an allowable deduction for tax purposes, your pension contributions have to be made ‘wholly and exclusively’ for the purposes of the business. This article by ACCA gives a good explanation of this. Basically, this means that the contribution should be at a reasonable level for the individual concerned. In practice, HMRC guidance is that:
- Pension contributions will normally pass the ‘wholly and exclusively’ test and will qualify for the available tax relief. However, if there’s a clear non-trade purpose, tax relief may be restricted or not allowed – so it’s important to pass the test.
- As a rule of thumb, if salary plus pension contributions (ignoring any dividend payments) are reasonable in total for the individual, your claim is unlikely to be challenged.
- There’s a theoretical limit of £40,000 per annum for an individual. But this limit can be increased under certain circumstances if the whole of the allowance wasn’t used in the three previous tax years.
- Contributions are generally allowed in the tax period in which they are physically paid, so it requires a bit of advance planning to make sure you don’t miss out.
Talk to us about offsetting your pension contributions
If you want to use pensions to save corporation tax by making director pension contributions through your limited company