Pension contributions to help reduce tax
How pensions can help you beat the Corporation Tax increases
With the rise in Corporation Tax from April 2023, it’s more important than ever to explore all the options when it comes to taking profits from your company, whether that’s through salary, dividends, or a company pension contribution.
Tax increases
From April we saw changes to Corporation Tax and a cut in the tax-free dividend allowance.
The main rate of Corporation Tax has increased from 19%. The new rates are: 19% on the first £50,000; 26.5% on profits between £50,000 and £250,000; 25% on profits over £250,000.
The amount of tax-free dividend income everyone can enjoy each tax year, was cut from £2,000 to £1,000 from 5th April and is due to fall to £500 from April 2024.
Company pension contributions
Employer pension contributions are one of the most tax efficient ways for Directors to take profits from the business:
- In most cases an employer pension contribution will be a fully deductible business expense meaning that no Corporation Tax will be payable on the contribution
- Unlike salary or bonus, there is no employer National Insurance to pay on the contribution, saving 13.8%
- The employee pays no Income Tax or National Insurance on the employer’s pension contribution.
In order to be treated as a business expense, an employer pension contribution must be 'wholly and exclusively' for business purpose. Your NFU Mutual Financial Adviser can explain this in more detail.
Bonus versus dividend versus pension
If we take an example: Peter is a director of his own company which makes a profit of £100,000 for the year ending 31st March 2024, of which he wishes to take out £40,000. He is already a 40% taxpayer with an income of £55,000.
| Bonus / Salary | Dividend | Pension | |
| Gross Profit | £40,000 | £40,000 | £40,000 |
| Employer NI | (£4,850) | ||
| Corporation Tax | (£10,600) | ||
| Amount available | £35,150 | £29,400 | |
| Employee NI | (£703) | ||
| Employee Tax | (£14,060) | (£9,585)* | |
| Net amount received | £20,387 (49% Tax) | £19,815 (50.4% Tax) | £40,000 invested in pension |
*Assumes £1,000 tax free dividend allowance available in full.
Taking money from your pension
You can take money from your pension from age 55 (57 from 2028). The amount of tax you’ll pay when you take the money out will depend on your other income in that year. The withdrawal could be split across tax years which could potentially reduce the tax paid.
Continuing the example above:
| Higher rate taxpayer (40%) | Basic rate taxpayer (20%) | |
| Amount in pension | £40,000 | £40,000 |
| 25% tax free* | £10,000 | £10,000 |
| 75% taxable | (£12,000) | (£6,000) |
| Net amount received | £28,000 (30% tax) | £34,000 (15% tax) |
It’s important to remember that the tax treatment of pensions depends on individual circumstances and may change in the future.
The value of investments can fall and you may get back less than invested.
Speak to our financial experts to find out more and get tailored advice unique to your circumstances.
NFU Mutual Financial Advisers advise on NFU Mutual products and selected products from specialist providers, they'll explain the advice services and charges. Financial advice is provided by NFU Mutual Select Investments Ltd.
