Have you considered using pensions contributions in your year end tax planning?
The maximum you can personally invest in your Directors Pension is 100% of your salary subject to a maximum annual allowance which is currently £40,000. Dividends would not be classed as salary.
So, if you have a salary of £10,000 and dividends of £45,000 the maximum you can personally invest in to your pension is £10,000. However, contributions made by your company, in to a pension, for you, are not restricted by your salary. Your company can invest the full annual allowance maximum of £40,000 and potentially more than this using the carry forward rules. You would need to satisfy what is called the ‘wholly & exclusively’ requirement but as a shareholding director this should not be a problem.
From a tax perspective, personal contributions to a pension would be made by you from NET income. The contribution would then qualify for basic rate tax relief at source and higher rate tax relief, could be claimed via your self-assessment tax return. The deadline for a personal investment tax wise is the end of the tax year. Company contributions to pension plans will be a deductible business expense and so potentially reduce the amount of Corporation Tax your company would pay.
Pension contributions are not subject to National Insurance. The deadline for a company investment from a tax perspective is your company’s year-end. This may well be different to the tax year. As mentioned, your company can possibly invest more than £40,000 as you can carry forward unused annual allowances from the 3 previous tax years. To be able to do this, you must have been a member of a pension scheme during the carry forward years although not necessarily making contributions.
This blog first appeared in January 2017 as a feature article for Rawcliffe & Co Chartered Accountants’ Blog. To stay informed with all issues financial & tax related, including key dates and important deadlines head over to Rawcliffe Blog.