Pension contributions as a year-end tax planning tool

A company pension contribution is one of the most effective ways to reduce your Corporation Tax bill before your year-end, while building your own pension. The company normally deducts the full amount from its profit before tax.

How the saving works

The contribution reduces taxable profit, so the saving is the contribution multiplied by your company's Corporation Tax rate. At the 19% small profits rate, a £10,000 contribution saves £1,900. If your profit falls in the marginal band between £50,000 and £250,000, the effective saving is higher, around 26.5%, so the same £10,000 contribution can save around £2,650.

Timing is everything

Relief is given in the accounting period in which the contribution is actually paid, not when it is accrued or planned. So, to cut this year's bill, the payment must leave the company's bank account before your accounting year-end. A contribution merely provided for in the accounts does not qualify, which is why this works as a year-end planning tool only if acted on in time.

Eligibility: the "wholly and exclusively" test

To be deductible, the contribution must be "wholly and exclusively" for the business. For a working director, this is normally met, as it forms part of your reward for the work you do. HMRC can challenge amounts that look excessive for the role, particularly for a family member not genuinely working in the business, so the amount should be justifiable against the work done.

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