As a business owner, you can reduce your company’s tax liability simply by making lump sum contributions to your pension.
That’s because contributions you make to your pension as a business owner usually count as employer contributions.
This brings some key benefits with it.
When you make pension contributions, the UK government will give you tax relief at your marginal rate of Income Tax on those contributions.
That means, if you pay basic-rate Income Tax, a £100 contribution into your pension costs you just £80.
For higher-rate taxpayers, a £100 pension contribution costs £60, and the same contribution costs just £55 for additional-rate taxpayers.
Higher- and additional-rate taxpayers must claim tax relief above the basic rate through a self-assessment tax return.
Contributing as an employer reduces your tax liability
You can contribute to your pension either as an individual or as your own employer. In general, it’s more tax-efficient to do the latter as:
- Employer contributions made from pre-taxed company income will receive tax relief. This could save you up to 25% in Corporation Tax from 2023.
- You don’t have to pay National Insurance on pension contributions, which could save you 13.8% in the 2021/22 tax year, rising to 15.05% in 2022/23.
These percentages can represent serious savings on your business income.
Beware the pension Annual Allowance
Bear in mind that you may exceed the pension Annual Allowance if you decide to pursue this option.
Each tax year, you can contribute and receive tax relief on pension contributions up to £40,000 or 100% of your earnings, whichever is lower.
The Tapered Annual Allowance
If you’re drawing a large income from your business, your Annual Allowance may be tapered.
The taper comes into effect if your threshold income is more than £200,000 and your adjusted income is more than £240,000.
For every £2 that you exceed the £240,000 limit, your Annual Allowance will be reduced by £1, down to a minimum of £4,000.
That means, if you take £312,000 or more from your business, you may only receive tax relief on £4,000 of your pension contributions.
Find out more
If you’d like to find out more about this strategy, as well as four more ways that your pension can help your business, please download your free guide right here.
Alternatively, please email firstname.lastname@example.org or call 0113 262 1242 to find out more.
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.