If you are a business owner who works within the company, you may empathise with the feeling of being totally consumed by your work.
Having built a company from the grassroots stages into a successful enterprise, you are likely to eat, sleep, and breathe your working life. Although this may have been necessary to get your company off the ground, you might not have paid close enough attention to your personal finances in recent years.
Yet as both an employer and an employee, taking your eye off the ball when it comes to your personal wealth can be damaging – especially when it comes to tax.
As a “double taxpayer” of Corporation Tax and Income Tax, in addition to having a National Insurance (NI) liability on both your company finances and your own earnings, it’s easy to focus on lowering one tax bill while losing track of the other. With so many plates spinning, you could even feel overwhelmed by the responsibility of ticking every box correctly, and may end up accepting a higher-than-necessary tax bill as a result.
Luckily, there is one key way you can improve your tax efficiency on both sides, and that is through making pension contributions.
Read on to find out all you need to know about mitigating your tax liability through both employer and employee pension contributions.
Paying pension contributions as an employer can reduce the amount of Corporation Tax and National Insurance you pay
No matter how many people you employ, you have a responsibility to contribute towards their pension in most cases.
Employees must be automatically enrolled in a pension scheme if they are:
- Over 22 years old
- Classed as a “worker” by your business
- Paid more than £10,000 a year.
This includes you, if you pay yourself a salary from your business.
Once the employee is automatically enrolled, they must pay a minimum of 4% of their salary into their pension scheme, and usually receive an additional 1% in tax relief on this payment. As an employer, you are also required to pay at least 3% of their earnings into their pension.
Many employers go beyond this requirement and match or exceed minimum pension contributions. But no matter how much or little you contribute as a business owner, you may feel worried that this extra expenditure might make costs even tighter, particularly in the inflationary conditions the UK is seeing today. The Office for National Statistics (ONS) reports that inflation reached 7.9% in the year to June 2023.
Look at employer pension contributions in a new light, however, and you will see that although these outgoings cost your business money, they can also reduce your tax bill significantly.
As of the 2023/24 tax year, employer pension contributions are not usually subject to NI. In addition, as pension contributions are considered an “allowable expense”, your business is likely to benefit from Corporation Tax relief on pension payments.
So, contributing into your employees’ pensions could actually be instrumental in lowering your business’s tax and NI liability overall. This may be especially important in 2023, because in April, Corporation Tax increased by 6% for many businesses.
Making pension contributions as an employee can mitigate your Income Tax bill
If you are employed by your business, making as many pension contributions as you can within the Annual Allowance can be highly constructive. The Annual Allowance usually stands at £60,000 or your total earnings, whichever lower, in the 2023/24 tax year.
Firstly, it’s important to note that many business owners rely on a company sale, or continued profits if they plan to pass the company down to the next generation, to fund their retirement. No matter how viable your business is, relying solely on business earnings could be described as a high-risk strategy. Building a personal retirement fund outside of your corporate wealth can be a beneficial way to back up your corporate capital with a foundation of personal wealth.
Secondly, as an employee, rerouting as much as you can of your salary into your pension pot can decrease your Income Tax bill and provide you with tax relief at the same time.
Opting to increase your pension contributions as a “salary sacrifice” means that you’ll only pay Income Tax on what you take home. By reducing your take-home pay, and in turn the Income Tax bill you incur, you could even keep yourself in a lower tax band – all the while funnelling the rest of your remuneration into your personal pension pot.
What’s more, when your contributions lie within the Annual Allowance, you can receive tax relief from the government on the amount you put in. The breakdown of tax relief is as follows:
- Basic-rate tax relief stands at 20%, added automatically when you pay into your pension
- Higher-rate tax relief is 40%, which can be claimed through self-assessment
- Additional-rate tax relief is 45%. This must also be claimed on your self-assessment form.
So, upping your pension contributions can have huge benefits for your tax bill and future retirement plans. With a pension pot left to mature throughout your career, you may have the peace of mind that if your business were to take a hit in the future, you can still afford to retire as planned.
Overall, pension contributions can have substantial tax benefits for both employers and employees. If you wear both hats, ensuring you are maximising this tax-efficient opportunity could help you achieve the financial future you deserve.
Get in touch
Working with a financial planner can be hugely constructive for business owners who are managing both their corporate and personal wealth. Email us at [email protected], or call 01273 076 587.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax