Employer contributions to registered pensions can be a savvy way to move money out of a company, but it's crucial to navigate the various restrictions carefully. Here are some key benefits:
Corporation Tax Deduction: Companies can get a corporation tax deduction for pension contributions to their directors/employees, provided these contributions meet the 'wholly and exclusively' rule and are paid within the accounting period. The current corporation tax rate varies from 19% to 25%.
Income Tax Exemption for Directors: Directors won't pay income tax on pension contributions made by the company, as long as these don't exceed the annual allowance (which is £60,000 for the current tax year and £40,000 for 2022/23 and earlier years, though it's tapered for high earners). Remember, income tax rates for employment income range from 20% to 45%.
No NIC Implications: Neither the company nor the directors face National Insurance Contributions (NIC) issues, provided the contributions are made by the company.
However, there's a significant caveat: the pension pot can only be accessed from age 55 (which is changing to 57). Despite this, pensions are still a valuable option to consider for their tax efficiency.
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