In the spring Budget on 15 March, chancellor Jeremy Hunt announced key changes to the UK’s Corporation Tax rates for businesses. 

Rising from 19% to 25% from 6 April 2023, limited companies with profits exceeding £250,000 will now face a higher rate of Corporation Tax on their earnings.

Profits equal to or lower than £50,000 will remain on the 19% rate, while those with profits between £50,000 and £250,000 will be charged tax at a tiered rate, depending on where you fall between these two thresholds.

So, if you have profits of more than £250,000, you will likely see your tax bill increase over the next few months. 

Fortunately, there are methods at your disposal that can allow you to reduce the tax bill you might face, one of which may be your pension.

So, find out why your pension can be such an effective tool in reducing your Corporation Tax bill.

Employer pension contributions are “allowable expenses”

The reason that your pension could be an option for making your business more tax-efficient is because employer pension contributions are usually considered to be “allowable business expenses”.

This means that pension contributions you make don’t attract any Corporation Tax at all, as you’ll reduce your company’s taxable profits when you make them. So, a £100 pension contribution will effectively only “cost” your business between £81 and £75, depending on the Corporation Tax rate you pay based on your company’s total profits.

Furthermore, you won’t have to pay National Insurance (NI) on your pension contributions, too. As a result, you’ll save a further 13.8% on what you contribute to your pension.

So, despite the increase to the Corporation Tax rate, you could offset this by making larger contributions to your pension from your company’s profits.

Your pension is a tax-efficient way to withdraw money from your business

Aside from the Corporation Tax benefits, your pension is also a personally tax-efficient way for you to extract money from your company.

You can contribute pre-taxed company income directly into your pension as an employer contribution, rather than withdrawing it and paying the potential Income Tax bill. 

Similarly, this is also more tax-efficient than taking income in the form of company dividends. Any dividends taken that exceed the Dividend Allowance (which fell from £2,000 to £1,000 on 6 April) would be subject to Dividend Tax, with your rate of tax depending on which Income Tax band you fall in.

Even if your income falls in the basic-rate tax band, contributing pre-taxed company profits directly into your pension will likely still be a more tax-efficient method of extracting money from your business.

Pension limits were made more favourable in the spring Budget

Another reason that your pension could be a good home for your money in the wake of the spring Budget is that the chancellor has also made changes to two of the key pension limits.

Firstly, the Lifetime Allowance (LTA) will not be applied in the 2023/24 tax year. Sitting at £1,073,100 in the 2022/23 tax year, the LTA is the total amount you could save into your pensions without facing an additional tax charge when you come to draw any money in excess of it.

But the chancellor confirmed that no LTA charges would be applied in the 2023/24 tax year, with the limit set to be entirely abolished in a future Finance Bill. This means there will be no limit to the total amount you can save into your fund throughout your time running your business.

That said, it’s worth noting that the Labour Party have said they will reinstate the LTA if they were to come into power, as PensionsAge reports.

Furthermore, the pension Annual Allowance has also been increased from £40,000 to £60,000 a year. This is the amount you can tax-efficiently contribute to your pension in a single tax year, including employer contributions and tax relief.

This means you may potentially be able to benefit from tax relief on another £20,000 of contributions, depending on your taxable earnings.

Bear in mind that your Annual Allowance will be £60,000 or 100% of your earnings, whichever is lower.

In combination, these changes can make pension saving more tax-efficient, giving you even more reason to consider increasing your contributions.

Get in touch

If you’d like help managing your finances as a business owner, please do get in touch with us at Cordiner Wealth.

Email hello@cordinerwealth.co.uk or call 0113 262 1242 to speak to us today.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.