If you’re looking for ways to minimise your corporation tax bill, it’s worth considering if there are deductible expenses you can claim.
One key area to think about is your director pension contributions, as these can be offset against your taxable profits.
Pension contributions for directors of up to £40K per annum can be deducted from your taxable profits.
With a tax saving of 19% of your pension contribution, this could potentially save you £7,600 per company director – a nice helping hand if you’re aiming to cut your tax costs.
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.
Like any expense, to be 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. 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.