Pension Funding By Companies
Posted by TaxInsider on Thu, 16/08/2012 - 12:26 300
A payment within the limits into a pension scheme for a director is a tax-deductible item for the company and is not classed as a benefit for the director. Contributions by a company on behalf of a director or employee count towards the annual allowance limit on tax-relieved pension contributions.
Therefore this can be a useful way of extracting surplus funds from a company or avoiding higher rate tax on further dividends or salary payments where the funds are not required to live on and surplus cash is building up within the company.
Note –special rules apply to spread pension contributions if these are excessively high in a particular year.
Example:
John pays himself a salary of £35,000 per annum from the company, and is aged 30.
He does not need any more income than this, and any additional salary or dividend will attract tax at the higher rate in his hands.
The company can pay a large contribution into a personal pension scheme on his behalf and no tax is payable on this contribution.
The contribution is tax deductible when computing the profits of the company and therefore saves corporation tax. For the financial year 2012 the small profits rate of corporation tax is 20% and the main rate is 24%.
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