How you can (legally) save as much as £15,000 a year in Corporation Tax
Do you run a limited company? Find out how you could save as much as £15,000 a year in corporation tax, just by investing in your pension.
Last week I was having a mentor session with an entrepreneur I have been working with for a couple of years. She’s had a successful 12 months with the products she’s launched, and told me she had over £100,000 sitting in her business bank account.
I asked her whether or not she had a pension, and she didn’t. So I recommended she open one before her business year end, and deposit £60,000 in it. This would not only give her a good starting point for saving for her retirement but, she was delighted to learn, it would also reduce her Corporation Tax bill by at least £11,400.
So how does this work?
How pension contributions reduce your business tax bill
If you run a limited company, you can invest up to £60,000 a year in a pension as a tax-free benefit. This means that the amount of money you pay tax on is reduced by the sum that you have put into your pension.
The small profits Corporation Tax rate for companies with profits under £50,000 is 19%, which means that for every £1,000 you invest in your pension, you could pay £190 less Corporation Tax. Here’s how much you can save for every £1,000 you invest:
- £1,000: £190
- £5,000: £950
- £10,000: £1,900
- £15,000: £2,850
- £20,000: £3,800
- £30,000: £5,700
- £40,000: £7,600
- £50,000: £9,500
- £60,000: £11,400
So even if you aren’t in the privileged position of having £60,000 to put into a pension, every penny that you can invest can help reduce your tax bill. Plus you’ll be benefiting from compound interest as you save for a more comfortable retirement.
How to save up to £15,000 a year in Corporation Tax
We have calculated these at the lowest rate of corporation tax, but if you are subject to a higher rate, you will save even more money.
For example, if your business profits are over £250,000 you will pay the main rate of Corporation Tax, which is 25%. If you were to invest £60,000 a year in your pension, this could save you a maximum of £15,000.
If your business profits are above £50,000 but below £250,000 you’ll be able to claim marginal relief. If you want an idea of what your tax might be, you can use free online calculators like this one.
You can carry forward your allowance from previous years
If you’re now kicking yourself that you didn’t take advantage of this before, we have more good news. Thanks to the pension carry forward rule, if you haven’t used all your pension allowance in previous tax years, you can carry the allowance forward for a maximum of three years.
So, if you have had an amazing year in business this year, and haven’t claimed any of your allowance from the previous years, you could also invest up to £180,000 in your pension which, at the main Corporation Tax rate would save you £45,000 in tax.
How to save in tax even if you don’t run a limited company
It’s not just limited company directors who can benefit from paying into a pension. If you are employed and meet the criteria, your employer must offer you a workplace pension scheme and contribute towards it.
There are benefits for freelancers, too. If you are self-employed, and a basic rate taxpayer you can get a 25% tax top up. This means that, for every £100 you invest in your pension, you’ll get another £25 from the government, making it £125.
As with the Corporation Tax benefit, you don’t need to be saving thousands into your pension to reap the rewards. Any money you put into your pension should work hard for you. So work out how much you can afford to invest now – then enjoy the tax benefits and long term rewards of compound interest.
Read more about pensions
Want to learn more about the benefits of pensions, and how to maximise your retirement income? We recommend checking out these articles:
