As a business leader, securing your future is likely high on your priority list. But are you making the most of the pension options available to you, particularly when it comes to saving tax and optimising your retirement savings?
One of the most powerful (yet often overlooked) strategies to boost your pension while reducing your corporation tax is paying into your pension pot directly from your business. This approach can help you make the most of both your retirement savings and tax efficiency, ensuring that you’re not only protecting your financial future but also reducing your company’s tax burden.
In this blog, we’ll explore how you could potentially optimise your pension plan, the benefits of paying directly into your pension from the company, and why it’s essential to have a (plan B) strategy in place – just in case plan a doesn’t work out.
Pay into your pension to reduce corporation tax.
One of the key benefits of contributing to your pension plan directly from the business is the ability to reduce your corporation tax. When you pay corporation tax, you are taxed based on the business’s profits. This means that if your business is profitable, you’ll pay a percentage of those profits to the taxman.
However, when you make pension contributions from the business, these contributions are treated as a business expense. In other words, the money you put into your pension pot is deducted from your profits before calculating your corporation tax. By reducing your taxable profits, you can reduce the amount of corporation tax your business has to pay – ultimately saving you money.
For example, let’s say your company made £100,000 in profits. If you contribute £20,000 into your pension pot, the company’s taxable profits are reduced to £80,000. This means you will only pay corporation tax on the lower amount.
As you know, pension contributions by the company do not carry an Employer’s National Insurance costs.
Why not just pay yourself a bonus – or extra dividends?
You might be thinking, “Why not just pay myself a bonus instead?”. While paying yourself a bonus (either through payroll or through dividends) sounds tempting, it can actually result in a heavier tax burden for you personally (and for the business too).
Bonuses paid through payroll are subject to income tax and Employee’s/Employer’s National Insurance, meaning you could end up paying a significant amount of tax on that extra cash.
On the other hand, paying into your pension pot from the business has several advantages – let’s explore the options:
Bonus through payroll.
- Bonuses paid through payroll will have PAYE, Employee’s National Insurance, and Employer’s National Insurance taken off – so you share your bonus with the tax man.
- Bonuses are treated as business expenses though, so the cost of the bonus and the Employer’s National Insurance will reduce the amount of corporation tax you pay.
- You can spend the money straight away (on a holiday/new car/school fees/savings account) paying no interest.
Dividends.
- Extra dividends still attract income tax, but you save on both Employee’s and Employer’s National Insurance.
- Dividends don’t reduce your corporation tax bill because they don’t reduce your company’s taxable profits.
- You can spend the money straight away (on a holiday/new car/school fees/savings account) paying no interest.
Pension payments.
- You don’t pay income tax on pension payments that your company pays into your pension plan (not until you draw your pension in many years’ time).
- There is no deduction of Employee’s and Employer’s National Insurance on pension contributions made by your company – which means your pension pot gets all the money.
- Pension contributions are an allowable business expense. This means your company’s taxable profits will be reduced by the pension contribution, which means a lower corporation tax bill.
- You don’t get to spend the money right now. However, the money in your pension pot grows tax-free, leveraging the magic of compound interest, allowing your investments to work harder for you in the long term – of course all investments can go up or down so there is a risk you’ll never get the money.
- When you get to a certain age, you can take up to 25% of your pension contribution out as cash tax free (correct as of 30th November 2024).
In summary – by paying the money directly into your pension from your company, you get to keep more of the money whilst legally reducing your tax bill.
How much can you (and your company) contribute to your pension?
The annual allowance for pension contributions is £60,000, which can be contributed to your pension pot each year. This applies to contributions from both you and the business, so if your company is paying into your pension on your behalf, you could be saving even more.
It’s important to note that if your business is making contributions to your pension, it counts towards the £60,000 annual allowance. However, if you’re not yet reaching the £60,000 limit, your business can continue to make contributions, helping you maximise your pension savings.
If you’re already receiving contributions to your pension from the business, ask yourself: Are you making the most of this opportunity? Could you be contributing more? And if you haven’t yet started using your company to pay into your pension, it might be time to consider this strategy to optimise your tax and retirement planning.
Are you using your company to fund your pension?
Many business leaders fail to leverage the full potential of their company to fund their pensions. If you haven’t been using the company to pay into your pension pot, ask yourself why not? Perhaps you’re not aware of the tax benefits, or maybe you haven’t considered how this strategy could fit into your overall financial plan.
Whatever the reason, it’s important to have a strategy in place for your retirement savings. After all, securing your future doesn’t just happen automatically – it requires planning and foresight.
By using your business to contribute to your pension, you’re not only securing your financial future, but you’re also making your business more tax-efficient in the process.
Do you have a retirement strategy?
As a business leader, funding your future doesn’t have to come at a hefty price. Having a strategy for your retirement is crucial (even if you’re only 25 years old!), especially when you’re running your own business.
It’s important to have a plan B in place – you probably have plans to exit your business at some stage (let’s face it we all will) and hopefully with a tidy sum in our pockets. But only 5% of businesses ever get sold with a significant pay-out to founders, so you may not want to put all your eggs in that basket and have a plan B.
Without a strategy, it’s easy to overlook opportunities for saving, and your retirement savings may not be as robust as they could be. It’s also important to regularly review your pension plan to ensure you’re on track to meet your future goals.
If you’re unsure about how to get started or want to ensure you’re making the most of your pension, it’s a good idea to speak to a pensions advisor. They can help you understand your options and create a plan that works for you, ensuring you’re making the most of your pension contributions and optimising your tax position. A pensions advisor can also help you navigate the complexities of pension rules, contribution limits, and tax efficiency.
With the right guidance, you can optimise your pension plan, secure your financial future, and reduce your tax liability—all while giving your business the opportunity to thrive.
Don’t wait to plan for your future. Start funding your future self today.
P.S. – We want to be clear that we are not a registered pension or investment adviser, we aren’t affiliated with any pension advisers, nor do we earn any commission from any wealth managers or advisers. This is purely the thoughts from one business leader to another.
