Given the changes the July 2015 budget made to how dividends are to be taxed, it is now more important than ever for owners of small limited companies to consider how best to withdraw company profits. One important planning strategy is to make or increase company pension contributions:
- Funds extraction will be from pre tax profits and therefore corporation tax (currently at 20%) will be saved.
- There is no NI on the payments into the fund.
- You will build personal funds which can be drawn from age 55. A tax free lump sum of 25% may then be taken but any other withdrawn funds are taxable.
Note, however, that:
- From April 2016 the amount that can be saved in a pension free of tax over the course of a lifetime will be reduced from £1.25m to £1m. If your savings are at or in excess of this level, it is probable that you will be able to protect these funds as long as further pension contributions are not made.
- The annual allowance for tax relief on pension contributions is currently £40,000 a year (for tax years between 6 April 2011 and 5 April 2014 the allowance was £50,000). Any unused annual allowance from the previous 3 years may be carried forward and used to top up the current year’s allowance.
- From April 2016, tax relief will be restricted through a tapered reduction in the amount of the annual allowance for individuals with income (including the value of any pension contributions) of over £150,000 and who have an income (excluding pension contributions) in excess of £110,000. The rate of reduction in the annual allowance will be £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum reduction of £30,000.
Note also that the government is considering taxing pensions like ISAs in future – contributions are paid from taxed income but funds are tax free when they come out.Share this: