Year End Tax Planning for Company Directors

If you’re reading this and you’ve left it too late late to use pension contributions to save corporation tax the good news is that you still have options.

Read on…

Getting your company to pay contributions for you is a very tax efficient way of maximising contributions. Particularly if your income is more dividends and less salary.

You can deduct your employer contributions from your company’s profits for corporation tax purposes. However the pension contribution has to be paid in the accounting period. You’re not able to accrue it for accounting purposes like other expenses.

So what can you do if you’ve got taxable profits this year but you’ve missed the deadline?

One option might be to pay a company contribution at the start of your next year to create or increase a tax loss. In which case you can carry the loss back or forward to reduce your company’s tax for the previous or a later year.

For example:

John is a director and shareholder of PlanA Ltd. He receives an annual salary of £12,000 and has dividends of £80,000 for the last 5 years.

He has no other income so he qualifies for the standard Annual Allowance (£40,000 in 2018/19).

John has been paying a small annual contribution of £1,200 into his personal pension on the 1 January each year for the last 5 years.

Based on his salary John is limited to a maximum personal contribution of £10,800 (£12,000 – £1,200) in the current tax year ending 5th April 2019.

But HMRC rules allow his company to pay a total contribution of up to £155,200 in the current tax year.

John’s company has built up plenty of cash that isn’t needed for working capital, so he’d like to find a tax efficient way of moving it out of the company. He doesn’t want to pay 45% income tax.

Unfortunately, John is so busy in the run up to the 2018 Christmas break that he doesn’t have time to set up the company pension contribution.

For the year end 31st December 2018 John’s company’s draft accounts are showing profits of £100,000 (before pension contributions). And John is pretty confident that profits will be similar in the next year end 31st December 2019.

What can he do?

If John’s company pays the maximum employer contribution for him from January 2019, it will be an expense for corporation tax relief purposes in the accounting period end 31st December 2019.

However if profits are £100,000 and the pension contribution of £155,200 it will create a loss of £55,200. John can elect to carry back the loss against his company’s corporation tax bill for 2018. Or instead he can carry the loss forward.

Please speak to your accountant before doing anything.

This is not advice and you should not act on anything in this article or on this website without seeking proper professional advice.

These are some other questions you might be asking:

  • Hillary Carden

    Hilary is a force to be reckoned with in the pensions field. She founded Cardens in 1993 and Cardens Pension Trustees Ltd in 1995 and became one of the first women to become a Registered Life Planner® and with 30+ years experience of advising on and managing pension schemes, she really is an expert in retirement and financial planning.

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