Maximising pension contributions and tax implications

May 28, 2024 | Tax Tuesday

When it comes to making tax advantaged pension contributions, one of the unfamiliar yet highly effective strategies for maximising pension contributions involves carrying forward unused annual allowances from the previous three tax years. This can be significant, especially for business owners and high earners looking to optimise their tax positions.

Have you considered how leveraging your pension annual allowance utilising company funds in this way could impact your company’s Corporation Tax?

In this week’s Tax Tuesday, we delve into how you can use your pension contributions more strategically when using company funds.

How does it work?

Each individual has an annual allowance of £60,000 (as of the 2023/24 tax year) that they can contribute to their pension without incurring tax charges. If you have not fully utilised your annual allowance in any of the previous three tax years, you can carry forward the unused amount and add it to your current year’s allowance.

For instance, if you have only used £20,000 of your annual allowance in each of the past three years, you could carry forward £20,000 from each year. This would give you an additional £60,000 to contribute in the current year, on top of your current £60,000 allowance. This means you could potentially contribute £120,000 in one year.

Impact on Corporation Tax

When utilising company funds to make pension contributions, these payments are treated as an allowable business expense. This can significantly reduce your Corporation Tax liability. As an example, if your company makes a £120,000 pension contribution (and assuming the corporation tax rate is 25%) this could save the company £30,000 in tax.

It’s crucial to ensure that the total pension contributions are justifiable and exclusively for the purposes of the business. Excessive contributions might be scrutinised by HMRC, potentially leading to disallowance of the deduction.

Earnings over £50,000: Investing more in pension

For individuals earning over £50,000, increasing pension contributions can be a smart way to bring taxable income back within the basic rate band, thus minimising the tax burden.

How it works

The basic rate band for income tax is up to £50,270. Earnings above this threshold are taxed at 40% (higher rate) up to £125,140, beyond which the additional rate of 45% applies.

By making personal pension contributions, you reduce the impact of your income in the higher rate tax bracket. For example, if you earn £60,000 and make a £10,000 pension contribution, this keeps you within the basic rate band, saving you from paying higher rate tax on the excess £10,000.

Tax relief

Personal pension contributions are eligible for tax relief at the individual’s marginal rate of tax, meaning that for someone in the higher rate band, a £10,000 contribution effectively costs only £6,000 after tax relief.

Additionally, if your company makes the contribution as your employer, the amount is not subject to National Insurance Contributions (NICs), making it even more tax efficient.

How can we help?

Maximising pension contributions through the carry-forward rule and strategic investments can significantly enhance your tax efficiency, whether you’re aiming to reduce corporation tax liability or keep your personal income within the basic rate band.

If you need guidance in navigating pension contributions, please contact your relationship principal, email or call 0161 905 1616 if you’d like to discuss.

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