As a business owner, some of your key areas of focus are maximising profits managing costs and to-day operations. Reducing and managing tax is another area of focus. This includes Corporation Tax, and personal taxes. But, did you know that pensions are a solid way for business owners to save tax?
Pensions aren’t just a tool for retirement planning.
They’re also one of the most tax-efficient investments for higher rate taxpayers. As a result, pensions are a solid way for business owners to manage their company and personal taxes.
In this article, we’ll explore how pensions can help business owners save tax while building a secure retirement.
From employer contributions to tax reliefs and salary sacrifice schemes, discover how using pensions purposefully can benefit both your business and personal wealth.
What you will learn in today’s article
- How pensions offer tax savings for business owners
- The different tax planning strategies to consider
- Long-term advantages of building a pension pot
- Why pension contributions via company funds is tax efficient
- Insight into some recent changes to UK tax laws
Using pensions to reduce and save tax
Pensions provide a double benefit: they help secure your retirement while offering significant tax savings.
Business owners have a right to mitigate taxes, where possible. Furthermore, reducing taxes enables business owners and company directors reinvest their profits.
As a result, more jobs are created, the company is more financially secure, and staff are well looked after.
How do company owners use pensions to reduce tax?
In the following sections, we cover:
- Using pension contributions to reduce Corporation Tax
- The role of employer pension contributions
- How salary sacrifice can help business owners save tax
- The changes to the lifetime allowance and IHT planning
Firstly, let’s take a look at how pension contributions using company funds, reduces Corporation Tax.
Using pension contributions to reduce Corporation Tax
Contributions to pensions are tax-deductible, meaning they reduce your taxable income or profits.
For example, if you own a limited company, using company funds to contribute to your pension help to reduce your company’s Corporation Tax liability.
This creates an opportunity to extract profits from your business in a tax-efficient manner.
Additionally, personal contributions to pensions attract tax relief at your highest rate, effectively boosting your retirement savings.
Example
If your limited company contributes £20,000 to your pension, this amount:
- Reduces the company’s taxable profits by £20,000
- Lowers the corporation tax bill, saving the company money
- Builds your retirement fund tax-efficiently
The above is an outline example of how pensions save company owners tax.
Related reading: How are pensions tax efficient investments for higher earners?
The role of employer pension contributions
Are you making the most of employer contributions?
Business owners can contribute to their pensions through their company. As a result, this allows these payments to count as allowable business expenses.
This is another example of how pensions can save business owners tax.
How do employer pension contributions reduce tax?
For example, if your company pays £20,000 annually into your pension, this reduces the company’s taxable profit, saving corporation tax.
At the same time, these contributions aren’t subject to National Insurance or income tax, making them a cost-effective way to save for retirement.
Employer contributions are a particularly useful tool for business owners who want to extract profits without incurring additional taxes.
Related reading:
Salary sacrifice
Have you considered a salary sacrifice arrangement?
In a nutshell, this allows you to exchange part of your salary for increased employer pension contributions.
Using salary sacrifice to minimise taxes
If you earn £50,000 annually and agree to sacrifice £5,000, your employer increases your pension contributions by the same amount.
Furthermore, this reduces your gross salary, lowering your income tax and National Insurance contributions.
Salary sacrifice not only boosts your pension investments, but also benefits your employer by reducing their National Insurance obligations.
Tax relief on personal pension contributions
If you are company director, are you maximising your personal pension contributions?
If not, you are missing on increasing the level of personal tax relief you receive from the government.
Tax relief makes pensions one of the most efficient ways to save.
A working example
For example, if you’re a higher-rate taxpayer, contributing £10,000 to your pension costs you just £6,000 after tax relief.
Basic-rate tax relief is applied automatically, and higher-rate taxpayers can claim additional relief through self-assessment.
This tax efficiency allows you to grow your pension pot faster, and could be a factor in helping you retire early.
Building wealth with pensions
Beyond tax savings, pensions provide a secure and flexible way to build wealth. They are certainly one of the best investments for high net worth individuals, as they are tax efficient, and the government makes further contributions on your behalf, effectively.
How?
Most pension funds are invested across a range of assets, offering potential for growth over time.
Additionally, pensions provide options for drawing income in retirement, such as tax-free lump sums and regular withdrawals.
With professional pension planning, you can achieve tax efficiency and financial security at the same time.
Abolition of the lifetime allowance – opportunities and considerations
The removal of the lifetime allowance cap in April 2024 presents major opportunities for business owners to increase pension savings while benefiting from corporation tax relief.
However, changes in inheritance tax rules mean pensions may now be subject to IHT.
Opportunities
- Unlimited pension contributions: No tax penalties on large pension pots.
- Lower corporation tax: Employer pension contributions reduce taxable profits.
- Tax-efficient profit extraction: Avoid National Insurance and dividend tax.
Inheritance tax considerations
- Pensions will be subject to IHT: New rules mean pensions may be taxed on death.
- Plan withdrawals carefully: Consider other tax-efficient wealth transfer options.
With no lifetime allowance restrictions but new inheritance tax rules, business owners should:
- Maximise pension contributions for tax efficiency.
- Consider alternative estate planning strategies.
Integrating pensions with business financial planning
For business owners and company directors, pensions aren’t just about personal savings.
They are a tool for managing company finances effectively.
For example, contributions can be aligned with other tax-efficient strategies, such as dividend payments or reinvestment in the business.
How do pensions save tax for business owners?
By now, you will understand how pensions are one of the most effective tools for business owners to save tax and build a secure future.
With proper planning, pensions become more than just a retirement fund.
They are a strategic asset for both your business and personal financial goals.
Some questions to ask yourself
- Are you using you pension to save you and your company tax?
- Have you explored salary sacrifice as a tax-saving strategy?
- Are you claiming all available tax relief on personal contributions?
- Do your pension plans align with your long-term financial goals?
- Is your pension strategy integrated with your business planning?
Business owner? Looking at ways to reduce taxes?
Call us now to request a callback with an experience investment manager.
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