Reduce Your Corporation Tax Bill by Offsetting Pension Contributions

Whenever you’re looking for a way to reduce your corporation tax bill, it’s important to consider claiming for deductible expenses. This is where your director pension contributions come in, as they can be offset against your taxable profits.

Up to £40,000 per annum of a directors pension contributions can be tax deductible. This equates to a tax saving of 19% of your total pension contribution, meaning you have the potential to save £7,600 per company director – a sizable chunk taken off your tax costs.

How do I offset my pension contributions?

Being able to treat your limited company pension contributions as an allowable business expense means you can offset this expense against your company’s corporation tax bill.

As with any expense, to qualify as an allowable deduction for tax purposes your pension contributions have to be made ‘wholly and exclusively’ for the purposes of the business. This means that the contribution should be at a reasonable level for the individual concerned.

In practice, HMRC guidance shows that:

  • Pension contributions will normally pass the ‘wholly and exclusively’ test and will qualify for the available tax relief. However, if there’s a clear non-trade purpose, tax relief may be restricted or not allowed – so it’s important to pass the test.
  • As a rule of thumb, if salary plus pension contributions (ignoring any dividend payments) are reasonable in total for the individual, your claim is unlikely to be challenged.
  • There’s a theoretical limit of £40,000 per annum to an individual. But this limit can be increased under certain circumstances, if the whole of the allowance wasn’t used in the three previous tax years.
  • Contributions are generally allowed in the tax period in which they are physically paid, so it requires a bit of advance planning to make sure you don’t miss out.

Talk to us about offsetting your pension contributions

If you’re making director pension contributions through your limited company, PennyBooks can help you claim this as a deductible expense and reduce your corporation tax bill.

Contact PennyBooks today and we will advise you on the most beneficial way to set up your pension. We will also factor these deductible expenses into your annual corporation tax return and save you money!

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James Watson