The recent increase in corporation tax rates has left many business owners contemplating ways to minimise their taxable profits. One potential solution worth considering is making pension contributions. Not only can this help you plan for your own retirement, but it can also reduce your corporation tax liability.
However, to make well-informed decisions about your pension contributions, it is important to review the recent changes in the UK pension system. In this article, we will provide a summary of the pension reforms introduced after the spring budget of 2023. Understanding these changes will assist you in navigating the landscape and optimising your pension planning.
Contributions to Pensions For business owners
Making pension contributions through the company’s employer scheme is an effective and tax-efficient way to build retirement savings while simultaneously lowering the corporation tax liability. As an illustration, a £50,000 pension contribution would reduce the corporation tax by £12,500 for companies taxed at a rate of 25%.
The annual allowance sets a limit on the amount of money you can accumulate in your pension tax-free within a single tax year while still benefiting from tax relief. You can also carry forward any unused allowances from the previous three tax years. Starting from April 6, 2023, the standard annual allowance will increase from £40,000 to £60,000.
For individuals with an ‘adjusted income’ exceeding £260,000, the standard annual allowance gradually reduces by £1 for every £2 of adjusted income above £260,000. The minimum tapered allowance is £10,000, meaning individuals with adjusted income of £360,000 or more will have an annual allowance of £10,000.
The lifetime allowance represents the maximum amount of pension savings an individual can accumulate during their lifetime without incurring a tax charge. The UK government sets this limit to prevent abuse of the tax relief provided to pension savers.
Previously, the lifetime allowance stood at £1,073,100 until April 2023. If your pension savings exceed the lifetime allowance, you may be subject to a tax charge. The charge can take the form of a lump sum or an ongoing tax charge, depending on how you choose to receive your benefits. The tax charge can reach up to 55% of the excess amount over the lifetime allowance.
As announced in the recent budget, the lifetime allowance has now been abolished.
This article provides general information on pensions and their tax implications. For specific advice regarding your pension savings and investments, please consult a financial advisor.