Maximising tax relief on company pension contributions
Employer pension contributions are very tax-efficient. They will become even more so from April 2023, when corporation tax (CT) is increasing for companies with profits exceeding £50,000 to a minimum of 25%.
Company pension contributions are free of income tax and National Insurance Contributions (NIC), unlike a salary payment that is then used to fund a pension contribution personally, which will get no NIC relief. An income tax charge may, however, arise on the individual if the total pension inputs by them and their employer exceed the pensions annual allowance (AA), which is normally £40,000.
Deductions are only allowed for CT purposes in the chargeable period in which the contributions are paid; having an accrued liability for the payment is not sufficient. Companies should consider accruing director pension contributions in years to 31 March 2022 and 2023, with a view to paying the accrued contributions in April 2023, when CT rates for profits above £50,000 will be higher.
The accounts will look ‘normal’ for the two years, as the directors’ remuneration package is consistent, but CT relief increases by at least 6% if paid on or after 1 April 2023. This is a saving of £2,400 pa on an accrued contribution of £40,000.
A director with a £40,000 AA can carry unused amounts forward for up to three years, so the deferred payment won’t produce any AA charge for them if made on or after 1 April 2023. The downside is that the director will lose out on potential pension fund growth on the £40,000 contribution until it is paid.
