Cutting corporation tax while building retirement wealth
Many business owners with limited companies can significantly reduce their corporation tax liability while building retirement savings through employer pension contributions. Starting early and contributing consistently maximises the compounding benefit.
Why employer pension contributions are particularly valuable for company directors
Employer pension contributions can be valuable for business owners who:
- are directors or employees of limited companies;
- have the flexibility to decide or negotiate how profits are extracted;
- have high income levels, where additional company remuneration, otherwise paid as salary, would incur higher or additional rates of income tax.
- wish to minimise personal and corporation tax;
- want to build savings for retirement in a pension scheme
This strategy forms part of broader planning that includes optimising the payment of salary and dividends, maximising the use of available personal and corporate tax allowances and reliefs, all in the context of planning towards long-term objectives.
Why do employer pension contributions matter?
Employer pension contributions are paid gross by the company and are deductible for corporation tax, provided they satisfy the wholly and exclusively test (meaning the contribution must be part of a reasonable remuneration package for the individual when considering what work they perform for the company). Contributions are made without incurring income tax or national insurance liabilities.
The key benefits are:
- Reduced corporation tax because the contribution is a deductible business expense.
- No income tax and national insurance, unlike salary or bonuses.
- Money is sheltered in a tax-free growth environment to accelerate retirement savings.
- Access to 25% income tax-free when benefits are drawn.
- Potential to withdraw at a lower income tax rate in retirement.
- The longer funds are invested, the greater growth potential.
What should business owners consider?
Affordability: Pension funding must be affordable for the business and satisfy the wholly and exclusively test for corporation tax relief. Lifetime planning, retirement goals and investment risk must all be considered.
Pension allowances: Annual allowance limits apply and must be reviewed carefully. Professional advice is crucial, particularly if you want to utilise any unused reliefs from up to three previous tax years.
Holistic approach: Given the interaction between corporate and personal tax, a coordinated approach is essential. Suitability will depend on remuneration structure, cash flow, intended retirement age and the overall financial position of the business.
Case study – employer contribution planning near age 75
A recent client’s experience demonstrates how valuable this approach can be, even in later life when retirement is fast approaching.
Our client owned a successful company and was approaching their 75th birthday. They wanted to make use of any remaining pension allowances to reduce their corporation tax whilst saving for retirement but were made aware that personal pension contributions cannot receive tax relief after age 75.
We reviewed the client’s position and identified that, although personal contributions cease to attract income tax relief at 75, employer contributions can continue beyond this age, provided the business meets the wholly and exclusively test and importantly, the pension provider accepts contributions for individuals post-75. Before their birthday, we helped them maximise all remaining carry forward, securing tax-efficient contributions that would otherwise have been lost. We also sourced a pension provider who would accept employer contributions post 75, allowing their company to keep funding their pension.
The results were significant. The company treated the contribution as a deductible expense, reducing its corporation tax liability. Unlike a salary payment, no income tax or national insurance arose. Placing the funds inside a tax-free growth environment also improved long-term outcomes for both retirement and estate planning.
For business owners in later life, employer pension contributions can remain a powerful planning tool long after personal contributions are no longer permitted. The approach requires careful assessment because acceptance of contributions beyond age 75 varies between providers and contributions must remain appropriate for the business.
How we can help
Whether you are at the start of your career as a business owner or approaching retirement, our financial planners ensure your remuneration strategies are effective, compliant and aligned with long term objectives. We assess how employer pension contributions may improve your tax position and support your plans for retirement.
For a confidential discussion, please contact us or visit our retirement planning page for further information.
