Q. My company trading year end is at the end of the month; will a pension contribution help mitigate some of my corporation tax?
Ewan Boyle, director, Johnston Campbell Ltd, independent financial advisers says:
Just before a year end is a great time to be considering a pension contribution.
A pension investment is treated as a trading expense and therefore will be fully offset against any corporation tax that is due. This is particularly effective if you are paying corporation tax at the marginal rate of 27.5%.
For example, if your trading profit, before a pension contribution is made is £350,000, then your tax bill in nine months time would be almost £74,000.
If, however, you pay a pension contribution of say £50,000 then the tax due would be reduced to £60,000 thus you would save almost £14,000 in tax.
In addition, any pension payment made by the company will not be treated as income from your own personal tax perspective, so this is a very tax efficient way of extracting monies from your business and putting it under your own control.
The rules as to how much you can pay into a pension have changed from the start of the tax year, and the new allowance is set at £50,000 per annum.
You can also go back a further three years with this allowance, so if - for example - you have made no pension provision over this time period, you have four years' allowances at £50,000 i.e, £200,000 that could be invested in one go.
All this is subject to the cash flow needs of the business, but before your firm enters into another trading year you should certainly look to see what sort of scope is available to alleviate some of the tax you would otherwise have to pay.