Can pension contributions reduce corporation tax?
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I have a small company that did well in 2021, thankfully. My wife is employed by the business and is a higher rate taxpayer. She already belongs to our workplace pension scheme but I wonder if we can make an additional pension contribution from her as a way of reducing corporation tax and benefiting us both?
Matthew Beck of Smith & Pinching responds:
This sounds like a good idea and one that will benefit both you as a couple and the business. You are right that employer pension contributions are normally tax-efficient for both the employer and the employee.
In most cases, employer pension contributions will attract Corporation Tax relief, but this is not automatic and will be up to your local inspector of taxes. The contributions will normally be deductible as an expense if they are incurred “wholly and exclusively” for the purpose of your trade or profession. It would be relatively rare for a pension contribution not to qualify under this rule, but I suggest you check with your accountant regarding your company’s tax position.
From your wife’s perspective, you can contribute to her pension scheme without it being treated as income for tax purposes. However, it’s critical that the total of the contributions from your wife and the company doesn’t exceed her annual allowance for pension contributions.
The annual allowance for most people stands at £40,000 but there are a couple of scenarios where a different allowance will apply. Some high earners may be subject to a reduced tapered annual allowance, depending on their qualifying earnings. Other pension savers who have started taking more than their tax-free cash from their pension may have a reduced allowance of just £4,000 per year. This reduced allowance is known as the Money Purchase Annual Allowance (MPAA). If you exceed your annual allowance, you may be subject to a tax charge on the excess.
It definitely makes sense for both you and your wife to have pension savings so that you can both take advantage of the tax relief on the pension contributions you make, particularly if you are higher rate taxpayers, and to maximise the allowances available to you.
It would certainly be a good idea to do some financial planning as a couple to ensure that you are on track to achieve your goals for retirement. I suggest you meet with an independent financial adviser from a firm of Chartered Financial Planners to build a financial plan that meets your needs in the long term.
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Any opinions expressed in this article do not constitute advice. They assume the 2021/22 tax year and may be subject to change. The value of your investment can fall as well as rise and is not guaranteed.
For more information, please visit www.smith-pinching.co.uk