Benefits of Pensions
We will highlight the main areas around pensions and the tax benefits - Different pension schemes have different rules so it might be beneficial to speak to an independent financial advisor about the best pension scheme for you - you can put the first £500 through the business for advice relating to pensions.
Pensions can be a very tax efficient way to put money aside for your future as you pay no income tax or national insurance when the contribution is paid in. When the contribution is paid through the company you will also receive a corporation tax deduction.
If you have the excess funds available and have made a profit in the year, you can often issue a pension contribution to reduce the profit and pay less corporation tax at the end of the year.
As a limited company it can be more beneficial to you you make "employer contributions" instead of personal contributions as it has great tax benefits.
If you are self-employed you cannot claim your pension contributions as a business cost (whereas a limited company can) however any pension contributions you do make personally, you will receive tax relief on at the rate of income tax you pay.
For Basic rate tax payers, tax relief will be automatically claimed at source by your pension provider, meaning there is nothing else for you to do!
If you are a higher rate tax payer, you will need to claim the additional tax relief from your pension contributions via your tax return.
The amount that can be contributed without Income Tax or National Insurance but with full corporation tax deduction is £40,000.
If you earn over £240,000 - restricted allowance
Over £312,000 - no allowance
If you go over the allowance you will be charged at your tax rate for the pension contributions
For self-employed your annual allowance is capped at £40,000 or 100% of your annual earnings up to £40,000.
Where your annual allowance is unused in the tax year, the balance can be carried forward for up to 3 years and added to the annual allowance for the current year
Example, if you have never contributed, your company can make a one-off pension contribution of £160,000 without any income tax or NI implications while receiving the full amount as a corporation tax deduction.
Withdrawing a Pension
Income or capital gains generated from the funds or assets in the pension are tax free.
You can't access your pension until you're at least 55. On withdrawal, up to 25% will be tax free. The remaining 75% can be taken when you wish so you can time your payments to take advantage of the personal allowance and tax rates.
Frequently asked questions
This article has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
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