How to pay corporate tax with the shareholder’s salary
09:15 april 29, 2022
I am the director of a small business, with my wife. We are the only shareholders. We are quite profitable, so we pay corporation tax on our profits. We would like to manage our corporation tax bill for the coming year and are wondering if we can do this with our salary package including our pensions. Is this a possible solution?
Matthew Beck of Smith & Pinching responds:
The obvious answer to reducing your profits for corporate tax purposes would be to pay yourself a higher salary or bonuses. However, all of this just shifts the tax burden from your business to you. Despite this, it makes sense to use your profits for your benefit. It’s just a matter of finding a way to do it without the tax pain.
Pension contributions certainly offer a solution. Your business may make employer contributions to your pension funds and these will normally be counted as business expenses, reducing your taxable profits, provided they can be described as “wholly and exclusively for the purposes of the ‘business “.
The amount of contribution is largely up to you, but you should bear in mind the annual pension contribution allowance which for most people is £40,000. People who benefit from their retirement and high incomes benefit from a reduced allowance. There is also a lifetime allowance for pensions which limits the total size of the fund over your lifetime to £1,073,100 (2022/23 rate). If you exceed the annual or lifetime allowance, you may have to pay taxes.
Another measure to explore could be placing your business premises in your pension funds using self-invested pensions (RSPP). In such an arrangement, the company would pay the rent for the premises to your pensions, which would reduce taxable profits and increase the value of your pension at the same time. A SIPP can even take out a mortgage to buy the premises. However, SIPPs are not suitable for everyone, so please seek independent advice.
Another option that you will benefit from as administrators could be relevant life insurance. The policy is taken out by the company to cover the life of the named persons. Premiums are paid by the business and qualify as business expenses, provided they also meet the “all and only” rule.
I suggest you do some financial planning for yourself and your business at this point. A Certified Financial Planner will assess your goals for the future of the business and your personal goals for your retirement. This will allow you to put together a plan that delivers on both counts.
The opinions expressed in this article do not constitute advice. A pension is a long-term investment. The value of the fund can fluctuate and may fall. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax laws.
For more information visit www.smith-pinching.co.uk