Can we pay Corporation Tax through our shareholder salaries?
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I am a director of a small business, along with my wife. We are the sole shareholders. We are quite profitable, so we are paying Corporation Tax on our profits. We’d like to manage our Corporation Tax bill for the coming year and wonder if we can do that through our salary package, including our pensions. Is that a feasible solution?
Matthew Beck of Smith & Pinching responds:
The obvious answer to reduce your profits for Corporation Tax purposes would be to pay yourself a higher salary or bonuses. However, all that really does is shift the tax burden from your business to you. Despite that, it does make sense to use your profits for your own benefit. It’s just a case of finding a way of doing so without the tax pain.
Pension contributions certainly provide a solution. Your business can make employer contributions to your pension funds and these will normally be counted as business expenses, reducing your taxable profits, provided they can be described as “wholly and exclusively for the purpose of the business”.
The size of the contribution is largely up to you, but you need to bear in mind the annual allowance for pension contributions which, for most people, is £40,000. Those taking benefits from their pension and particularly high earners have a reduced allowance. There is also a lifetime allowance for pensions that restricts the total fund size in your lifetime to £1,073,100 (2022/23 rate). If you exceed either the annual or the lifetime allowance, you may face a tax charge.
Another measure worth exploring might be to put your business premises into your pension funds by using Self-Invested Pensions (SIPPs). Under such an arrangement, the business would pay rent for the premises to your pensions, lowering taxable profits and increasing the value of your pension at the same time. A SIPP can even take out a mortgage to purchase the premises. However, SIPPs aren’t suitable for everyone so please take independent advice.
A further option to benefit you as directors might be relevant life cover. The policy is taken out by the business to cover the lives of named individuals. Premiums are paid by the business and are allowable as a business expense, providing they also pass the “wholly and exclusively” rule.
I suggest you do some financial planning for both yourselves and your business at this stage. A Chartered Financial Planner will evaluate your goals for the future of the business and your personal objectives for your retirement. This will enable you to put a plan in place that delivers on both counts.
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Any opinions expressed in this article do not constitute advice. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.
For more information, please visit www.smith-pinching.co.uk