Corporation Tax and Pension Contributions

Corporation Tax Savings using Pensions
Most Ltd Company owners know that making the best use of personal tax allowances and taking a mix of salary & dividends are the most tax efficient way of taking income but when higher rate tax becomes payable the decision between taking dividends, bonus and salary against corporation tax, personal tax and National insurance liabilities is less clear.
The potential for taking money out of the Company by making pension contributions with no personal tax liability and reducing corporation tax liabilities, as well as ringfencing funds away from company creditors,  is worthy of serious consideration.

When Higher Rate salary is paid, income tax is payable by the employee at 40% and national insurance contributions are paid by both the employer  at 13.8% and the employee  at  2%
40% + 13.8% + 2% = 55.8% Tax/Nics
(salary is a deduction before profit, so no corporation tax is due on salary payments).

When Higher Rate dividends are paid, income tax is payable by the employee at 32.5%,no national insurance contributions are payable by the employer or the employee as dividends are paid from profits, so instead Corporation tax is due on these payments at ,say, 20%)
32.5% + 20% = 52.5% Tax

Pension contributions paid by a Ltd company are tax relieved by paying contributions gross and these contributions are treated as a reduction in profit with no liability to corporation tax, income tax or national insurance.
0%+0% =0% Tax/Nics

Corporation Tax
Profits up to £300,000 = 20%
Profits Between £300,000 to £1.5M = marginal rate (approx 27.5%)
Profits above 1.5M = 26%

Income Tax
Earnings from £0 -£7,475 = 0%
Earnings from £7,475 – £35,000 = 20% (if taken as dividend 10%)
(£7,475 + £35,00 = £42,475)
Earnings from £42,475+ = 40% (or 32.5% if dividend)

National Insurance Contributions
Employer £7,228+ no limit = 13.8%
Employee between £7,228 to £42,484 = 12%
Employee  £42,484+ no limit = 2%

Veracity financial planning is not responsible for, nor does the Financial Services Authority regulate advice given with regard to taxation matters regard to trusts; some aspects of tax advice; commercial mortgages or second charge secured lending.
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