A look at Limited Company Expenses # 3 : Pensions
"What expenses are allowable in my Limited Company?"
This is perhaps one of the most frequently asked client questions, and understandably so. The tax burden of owning and operating a limited company is getting heavier. With Corporation Tax rates set to increase as well as tax on profit extraction (i.e Dividends) increasing next year, now is the time for owner managed limited companies to start taking stock of what expenses a company can claim for to offset against corporation tax, and the personal tax implications of any benefit in kind.
We're going to periodically look at different types of expenses in this series, including what is allowable, as well as why certain expenses are not allowable. We'll also be introducing you to some of our associates who can help in each particular field.
As always, these articles are for information only and do not constitute formal advice - should you wish for detailed, specific guidance, please contact us directly to discuss your circumstances.
As with other benefits, it is possible for your limited company to make pension contributions on your and your employees behalf. Your company could pay pension contributions into a pension which would be an allowable expense of the company for Corporation tax purposes while, provided the contributions are within the limits (annual limit is £40,000 but this reduces if you earn over £240,000), attract no immediate personal tax.
Peter Hannington of Norther Eagles Wealth Management writes,
"Pensions went through a phase of being unpopular for many years because of their lack of flexibility, however with the introduction of Pension Freedom they have once again become a popular way of both saving on Tax, both Income and Corporation Tax and the fact that benefits can be taken on an adhoc basis whilst still remaining invested and even passed on to other family members on death, their popularity has increased massively. In effect they become an incredibly Tax efficient and flexible bank account. The modern plans are able to take both regular and single contributions to allow companies and clients to maximise the benefits."
Peter is an associate of ours and authorised IFA meaning and he is best placed to discuss your pension requirements with you.
Employer contributions are payments your employer (i.e you) makes into your pension. So when the company contributes directly to your Pension (including SIPP's), both you and the company save tax.
These benefits are twofold. Profits you’re able to pay directly into your pension as an employer contribution no longer count as profits, which reduces your business’s liability for corporation tax. And as you’re not taking the profit as income now, you’ll lower your personal liability for income tax.
You can access the money you save in a pension from age 55 (rising to 57 in 2028). And when you do, you can take 25% of your pot tax-free. When you access the rest, you’ll pay income tax on it at your marginal rate.
So for companies making profit, it might be a good idea to consider your options and current setup with regards to pensions and the tax benefits available.
Note: Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension and pay into it, known as auto enrollment - more details here
Pensions are a more complex area of company expenditure and you should take proper advice from an IFA such as Peter before deciding whether they are right for you, as well discussing the tax implications with us.