Owner-managed companies with profits in the region of £150,000 to £250,000 are facing a significant tax hike this year. However, the tax increase can be mitigated by the company making pension contributions into a director’s self-invested personal pension (SIPP).
A company with a 31 March year end and profits of £150,000 will find that its corporation tax bill for the year ended 31 March 2024 has increased by some £7,500 compared with the previous year. Profits between £50,000 and £250,000 are now taxed at a marginal rate of 26.5%.
Tax planning
Directors who have previously been reluctant to make sizable pension contributions may now find a compelling case for doing so. Take the above example:
- If the company invests the maximum £60,000 into a self-invested personal pension, this will save corporation tax of £15,900 – much more than the additional £7,500.
- Once the director reaches 55, 25% of the pension fund can be withdrawn tax free. If a director is already 55 the funds are available immediately.
- If the remaining pension fund can be withdrawn so that just 20% basic rate tax is payable by the director, the overall tax rate on the pension income will be 15%. Very roughly, this allows the tax saving on the pension to balance out the additional tax cost faced by the company.
- Although there may not be any overall tax advantage as such, there is a timing benefit. The current year’s corporation tax bill is cut, but the tax cost does not come in until the director retires and draws the pension income.
Timing is critical: the pension contribution must be made before the end of the company’s accounting period.
Mitigating cost and risk
Low-cost providers allow the annual cost of maintaining a SIPP to be kept to a minimum.
One advantage of SIPPs is that they offer investment freedom. If a director has only a few years until retirement, they might not want to be exposed to stock market volatility. Investing in a fixed-term cash deposit account should avoid this risk.
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