Business Owners – The Value of Employer Pension Contributions
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Many business owners will arrange to pay a pension contribution on their behalf via their company and recent tax changes have made this even more attractive.
Corporation Tax
The level of Corporation Tax, as confirmed in the Spring Budget, is as follows:
19% for profits of £50,000 or less.
25% for profits above £250,000.
Marginal rate of relief for profits between £50,000 and £250,000.
Making an employer pension contribution can therefore reduce the overall Corporation Tax liability.
A business making profits of more than £250,000 and paying an employer pension contribution of £60,000 can save £15,000 in Corporation Tax.
Annual Allowance
Although, theoretically, the amount of contribution an employer can make to a pension is unlimited, a tax charge will be applied on the employee where contributions exceed the Annual Allowance. However, the Annual Allowance has now increased from £40,000 to £60,000.
There are some caveats to this:
The employer contribution has to satisfy the ‘wholly and exclusively for the purpose of the trade or profession’ test in order to receive Corporation Tax relief. I have yet to come across a case which has been challenged by HMRC and, indeed, HMRC’s view is that it would be, ‘relatively rare’ for a contribution not to be for the purpose of the employer’s trade. I would perhaps exercise a degree of caution when paying a large pension contribution to a relatively low paid employee who is not a controlling director.
Where an employee is subject to the Tapered Annual Allowance or Money Purchase Annual Allowance.
Carry Forward
It is possible to pay an employer contribution which uses up an employee’s current Annual Allowance and any unused Annual Allowance for the last three tax years. Remember that it is the Annual Allowance in force in that particular tax year, for example, £60,000 in this tax year and £40,000 each from the previous three tax years giving a total of £180,000.
This is potentially a good way to extract excess cash from the business.
Lifetime Allowance
Many business owners may have stopped making employer pension contributions because they have already built up a significant pension fund and are concerned about exceeding the Lifetime Allowance. With the removal of the Lifetime Allowance Charge from this tax year and the scrapping of it altogether next tax year, this is a good opportunity for business owners to make further contributions into their pensions and potentially use Carry Forward for any missed contributions.
Over Age 75
Employer pension contributions can continue to be made for employees over the age of 75 and attract Corporation Tax relief. This is potentially a great way for an older business owner to still receive a financial benefit from the company.
Summary
Although many business owners are focused on the ultimate sale of their business – ‘the business is my pension’ is a line that is often quoted by business owners – making employer pension contributions can be a very attractive and tax efficient way of saving for retirement.
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