Company pension contributions are generally regarded as a legitimate business expense, which means they are exempt from corporation tax. The example below shows the tax saving on a £10,000 pension contribution: 

If you have profits of £10,000, you will pay a minimum of 19% corporation tax which would leave a net sum of £8,100 (reducing to £7,500 if corporation tax is charged at 25%). If these balance profits are withdrawn as dividends, income tax is also due, depending on your marginal rate of tax, equivalent to either 8.75% (basic rate), 33.75% (higher rate) or 39.35% (additional rate). 

If you are a higher rate taxpayer, then the dividend income tax due is £2,733.75 (£8,100 x 33.75%) leaving a net payment of only £5,366.25 (only £4,968.75 if corporation tax is charged at 25%). Effectively, this example equates to an overall tax rate of either 46.33% or 53.66%! 

In this example, by making a company pension contribution of £10,000, the full £10,000 is allocated to your pension and your tax bill will reduce between £4,633 and £5,366. 

Company pension contributions reduce corporation tax, and, importantly, they help produce the funds to support you financially in retirement. For many people, they are underprepared for how much they actually need. 

To explore the possibility of reducing your corporation tax bill, contact us today and speak with one of our Wealth Management team. 

*Please note that the above article is not financial advice. Taxation rules change regularly, and any benefits will vary depending on circumstances.