Can corporate tax be reduced by pension contributions?
08:15 14 January 2022
I have a small business that did well in 2021 thankfully. My wife is employed by the company and is a higher rate taxpayer. She is already in our occupational pension scheme, but I wonder if we can pay her an additional pension contribution to reduce corporation tax and benefit both?
Matthew Beck of Smith & Pinching responds:
Sounds like a good idea and one that will benefit both you as a couple and the company. You’re right that employer pension contributions are normally tax-efficient for both employer and employee.
In most cases, employer pension contributions will attract corporate tax relief, but this is not automatic and will depend on your local tax inspector. Contributions will normally be deductible as an expense if incurred “wholly and exclusively” in the course of your trade or profession. It would be relatively rare for a pension contribution not to qualify under this rule, but I suggest you check with your accountant about your company’s tax status.
From your wife’s perspective, you can contribute to her retirement plan without it being considered income for tax purposes. However, it is essential that your spouse’s and company’s total contributions do not exceed her annual allowance for pension contributions.
The annual allowance for most people is £40,000, but there are a few scenarios where a different allowance will apply. Certain high earners may be subject to a reduced annual allowance, depending on their eligible income. Other savers who have started withdrawing more than their tax-free money from their pension may have a reduced allowance of just £4,000 a year. This reduced allowance is known as the Defined Contribution Annual Allowance (MPAA). If you exceed your annual allowance, you may be subject to a tax charge on the excess.
It certainly makes sense for you and your wife to have retirement savings so that you can both take advantage of the tax relief on the pension contributions you pay, especially if you are higher rate taxpayers, and to maximize the benefits available to you.
It would definitely be a good idea to do some financial planning as a couple to make sure you’re on track to reach your retirement goals. I suggest that you meet with an independent financial advisor from a firm of certified financial planners in order to build a financial plan that meets your long-term needs.
The opinions expressed in this article do not constitute advice. They assume the 2021/22 tax year and may be subject to change. The value of your investment can go down as well as up and is not guaranteed.
For more information visit www.smith-pinching.co.uk