Pensions are known as a tax-advantaged method of saving for retirement, but they can also help business owners save tax!
Here is how it works:
When your limited company contributes to your pension, the contributions are treated as business expenses which reduces your company`s profits for corporation tax purposes.
Let`s say your company makes £50,000 in profit before taxes:
· Without Pension Contribution: The company pays Corporation Tax on £50,000.
· With a £10,000 Pension Contribution: The company only pays Corporation Tax on £40,000, saving £1,900 in tax (19% of £10,000).
But here`s what makes it even more interesting:
You can use unused pension allowance from the previous three tax years to make a larger pension contribution in the current tax year, assuming you must have been a member of a UK-registered pension scheme during the years you want to carry forward from.
This can be especially beneficial for profitable companies with significant cash reserves.
Example: How Carry Forward Works
Let’s say you’re the sole director of a limited company and haven’t used your full allowance in the past three years:
Tax Year 2020/21: Allowance: £40,000 - Contributed £20,000 (unused: £20,000)
Tax Year 2021/22: Allowance: £40,000 - Contributed £30,000 (unused: £10,000)
Tax Year 2022/23: Allowance: £40,000 - Contributed £10,000 (unused: £30,000)
Current Tax Year 2023/24: Allowance is £60,000.
You could potentially contribute:
£60,000 (this year’s allowance) +
£20,000 (unused from 2020/21) +
£10,000 (unused from 2021/22) +
£30,000 (unused from 2022/23) =
£120,000 total without facing extra tax charges
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