Planning for the future by saving tax in the present

Matthew Waters
Financial Planning, Payroll
Stock image of savings

In 2012, due to concern that the UK population weren’t taking adequate measures to save for their retirement, the Government took the radical measure of introducing auto-enrolment.

Stock image of savings

This made it a legal requirement for employers to set up a workplace pension for qualifying employees and share the burden of contributing into this with their employees. 

When the UK Government evaluated the effects of the pension reform in 2019, more than 10.2 million workers had been auto-enrolled.

For many small companies, the reform was another employment cost they had to absorb and, for those directors who paid themselves a low annual salary, one they did not benefit from themselves. There will still be many directors whose companies are helping contribute towards their employees’ retirements without making adequate provision for their own, despite there being a corporation tax advantage to doing so. 

For companies looking to mitigate their annual tax bill and which have sufficient cash funds, pension contributions should form part of their corporation tax planning. In the simplest terms, if a company were to make a £10,000 contribution into a qualifying scheme on behalf of its director, it would obtain corporation tax relief at 19%; therefore costing the company £8,100 to give the director’s pension pot £10,000. 

With the rate of corporation tax payable by companies scheduled to rise to up to 25% depending on its profits, these contributions could become an increasingly important tool in controlling the rate at which the company is taxed.

Given that corporation tax relief if available, there are certain conditions which will need to be met. As with general business expenses, the “wholly and exclusively” test will need to be met by establishing if the overall remuneration package for the director is commercial reasonable based on the company’s performance. 

There is also a limit on the amount of pension contributions that can be made in any one tax year, this is known as the ‘annual allowance’. 

The annual allowance is the maximum amount of pension savings you can contribute into a pension in each tax year that can benefit from tax relief. It is based on your gross earnings for the year and is currently capped at £40,000 for the 2021/22 tax year. There is a lower limit of £4,000 that could apply if you have accessed your pension benefits flexibly through a money purchase style pension plan (known as the Money Purchase Annual Allowance). The annual allowance applies across all UK registered pension schemes that you belong to, and includes all of the contributions that you, your employer, or any other third party have contributed during the tax year. 

Please note that your annual allowance could also be reduced if your total income is above £200,000. This is referred to as ‘Tapered Annual Allowance’. 

There is, however, the option to carry forward any unused annual allowance from the previous three tax years, if you were a member of a registered pension scheme during that time. To use carry forward, you must make the maximum allowable contribution during the current tax year and you can then use unused annual allowances from the three previous tax years. This carry forward option may be particularly useful to you if you are a director of a limited company and you wish to make a large lump sum pension contribution following a successful business year. 

At Lovewell Blake, our partners and managers work side-by-side with the consultants of Lovewell Blake Financial Planning Limited to ensure our clients receive financial advice based on both their business and individual tax circumstances. 

If you are considering utilising company pension contributions to mitigate your corporation tax liability then please contact your usual adviser or

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