I know that pension savings aren’t everyone’s cup of tea but they do offer a highly tax efficient means of saving for retirement, reducing corporation tax and they can be a valuable inheritance tax saving tool.
Many people I know like to maximise their contributions, which ordinarily means a payment of £40,000 per annum (being the maximum annual allowance). They also tend to make one off contributions at the end of their accounting period, many of which are coming up on 31 December 2022. However, there’s an important reason to consider whether to make the payment before that date or delay it into the next accounting period.
Corporation tax rates are increasing from 1 April 2023, meaning that a company with a 31 December 2023 year end and profits in excess of £250,000 will save at an average rate of 23.5%. So, would you rather obtain tax relief of £7,600 on every £40,000 of contributions made before 31 December 2022 or delay until 1 January 2023 onwards and obtain relief of £9,400, saving an additional £1,800 of corporation tax?
If your profits are between £50,000 and £250,000 then the saving is greater as the marginal rate of corporation tax between those amounts for a 31 December 2023 year end is 24.65%, thereby saving £2,260 per £40,000 contribution.
The amounts may seem trivial to some but if you make significant pensions contributions across your owner managed business then I strongly recommend reviewing this in more detail. The same approach applies to year ends of 31 March 2023, where the savings are even greater of £3,000 for a marginal rate company.
If you haven’t already done so, it is also possible to access unused allowances from the three previous tax years, which could mean a one off contribution of £160,000 per person and the additional tax savings thereon.
There will be many other matters to consider (such as the cash flow cost of delaying the tax saving) and you should seek advice based on your individual circumstances before taking any action.
