Calling all Business Owners – Pension Planning
The Chancellor’s Budget has been designed to guide us out of the Covid crisis.
It’s no secret that we will all end up paying for the Covid relief spending, but the debt repayment has been staged, and structured to tax entities that are doing well (i.e. large corporations with over £50,000 of profit) and by freezing income tax bands, which is a back-handed way of raising taxes once you take inflation into account.
One of the main wealth management implications are additional requirements for pension planning, particularly for business owners who can reduce the amount of corporation tax that they pay by contributing into their pensions.
Tax Relief on Company Pension Contributions Is Increasing from April 2023 Where Profits Exceed £50,000
From April 2023 Corporation Tax is increasing for companies whose profits exceed £50,000.
The rate will be tapered so that profits below £50,000 will be taxed at the current rate of 19% and there will be tapered increase for profits between £50,000 and £250,000.
Profits of over £250,000 will be taxed at 25%.
As tax relief on company pension contributions is applied by treating the contribution as a business expense, the rate of tax relief is directly related to the consequent reduction in profit.
This means tax relief will be increased for companies whose profits exceed £50,000.
Pension Annual Allowance & Carry Forward Allowance
The standard Annual Allowance for pension contributions has been maintained at £40,000 (for those who have not already flexibly accessed their retirement savings and caught by the Tapered Annual Allowance).
The standard Carry Forward Allowance has also been maintained, and if you want to make the most of your pension allowances, you can take advantage of an unused pension allowances from the previous three tax years – as long as you had a pension in the year that you wish to carry forward from. You should have already set up NEST/People’s Pension type arrangement for you and your employees to meet the Auto-enrolment rules.
Including the current tax year, that could mean that you’re able to make pension contributions of up to £160,000 into your pension – as long as the contribution is viewed as ‘commercially reasonable’ for the work completed. If you have been instrumental in the company’s growth over the last three years then this is a way to reduce taxes and earmark funds for your retirement.
Considerations
Business owners must balance the need for cash flow within the business to help aid business expansion, and the desire to maximise tax relief and build a substantial pension fund.
However, one thing is for sure, when profits are rising, you should consider making company pension contributions!