Q Should I be making direct company-funded pension contributions as I understand I can save on corporation tax, NICs and income tax from doing so, in addition to the normal pension benefits?
A There are two ways of looking at this. From a business owner’s point of view, making company-funded pension contributions is a really good way of extracting profit. Employer contributions are tax deductible, reducing your profits subject to corporation tax.
The money paid into an individual’s pension scheme can then be withdrawn when they reach pensionable age (bear in mind, when the individual draws cash out of the pension scheme, depending on their circumstances, they will probably be required to pay income tax on the amount).
By paying the same amount as remuneration, you will get relief for corporation tax but you will attract employer’s national insurance on the payment. It’s also important to know that you do actually need to make the payments. You can’t just accrue and declare planned payments into a pension scheme. The payments must physically leave the company for it to be corporation tax deductible.
So, if you are a business owner, it’s a great way to extract profit and be tax efficient. As an employer, for the same reasons, it can be beneficial to consider setting your pension scheme up as a salary sacrifice for your employees, under which all contributions which go into the scheme are corporation tax deductible and are also deductible from employee salaries before income tax and national insurance. This also saves the employer’s national insurance on the payments.
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As with all significant financial decisions, business owners should consider the wider commercial implications, understanding that cash paid into a pension scheme is locked away for the long-term. Typically, the preference to have cash available now — particularly in the current climate and post-Covid recovery — results in pension contributions being one of the first expenses to be delayed.
In summary, company funded pension contributions are a good way of extracting money from the business in a tax efficient way, which often benefits business owners, employers and employees alike.
Tracey Richardson is an audit and assurance partner at the accountants and business advisers Azets
