Is it worth making pension contributions?

Is it worth making pension contributions?

Using pension contributions as a means of accessing profits from a company has always been a worthwhile avenue for many business owners. Even more so today! So why is this something that has not been utilised by so many?

There are a number of valid historic reasons for this, but fundamentally many of these are no longer relevant.  So definitely worth re-visiting even if you have done so in the past!

A couple of these reasons are considered below:

Firstly, perhaps one of the most common reasons for this is timing.  It is often a suggestion made by your accountant at the time you are discussing the previous years accounts and given the dreaded corporation tax bill!  “Maybe next year we can consider using a pension contribution to offset some of the tax” – handshakes and nods of agreement then follow. This cycle happens annually… unfortunately just after that years tax bill!  Xero allows you and us to know the profitability of the business and to understand the impending tax bill BEFORE the year end – meaning we can all understand the tax benefits in the current year before the timeframe has passed.

Remember, a pension contribution offsets your company profits for the year.

For example: If a company has made a £20,000 profit for the year, there will be a corporation tax bill of £4,000 (20%).  If that same company contributed £20,000 to a pension, the profit will be zero – meaning NO corporation tax due.  For many, a middle ground is usually used allowing for required cash flow, but an informed decision is hugely significant!!

Secondly, pensions were always seen as somewhat restrictive in terms of accessing the pots.  Tax payable on the way out, or only ever being drip fed the income, are all reasons that put people off – for all the right reasons.

Based on the new flexible access to pensions, the above is no longer relevant.  You can access the pots at any age and any amount from age 55! These relaxed rules mean, for many, especially those considering early retirement, that accessing these pots in a tax efficient way gives a considerable benefit.  How that works is for another day but happy to discuss with anyone interested.

You can access 25% of your pension pot(s) tax free with the remainder taxed at your marginal rate. This flexibility therefore means, planned properly, there is a lot of scope for beneficial planning.

Lastly, any contributions that you make into a pension (for yourself as a director) will be taken into account, along with salaries, when assessing the amount that the business has spent on research and development – making that R&D Tax Credits claim really appealing and well worth while!

Where to start?  The best place is talking with your adviser.  At Progression, your accountant and financial adviser are under one roof and, because they work together, will be able to provide truly effective tax and financial planning, including the assessment on R&D Tax Credits.  There are so many benefits and tax saving opportunities in terms of making pension contributions right now, it’s so important to ensure all avenues are explored to maximise all returns!

Scott Golland

Independent Financial Adviser @ Progression Financial Planning

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