01 August 2017
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Tax Reliefs including R&D
Did you know tax relief is given against corporation tax on employer contributions?
Tax relief on employer contributions is given by allowing contributions to be deducted as an expense when calculating company profits. Detailed guidance can be found in:
- Business Income Manual at BIM46000 onwards for trading employers.
- Company Taxation Manual at CTM08340 onwards for investment companies
For tax relief to be given on employer contributions, the contributions need to be deducted as an expense when calculating the profits of a trade, profession or investment business. The contributions should be included in the profit and loss account of the employer and which will result in the total employer's profit being reduced.
When an employer makes a pension contribution, it could significantly reduce the amount of tax paid on pension contributions in the following ways:
Less corporation tax
Pension contributions can be treated as an allowable business expense and offset against your company's corporation tax bill.
Less income tax
For a sole trader or partnership, employer contributions for employees can be set against your income tax liability.
No National Insurance
Unlike salary, pension contributions are not subject to National Insurance.
Firstly, employer pension contributions are an allowable business expense so the company could save up to 19% in corporation tax relief. For a sole trader or partnership, an employer contribution in respect of the employee can be tax relieved as a business expense.
Secondly, as employers don't have to pay National Insurance on pension contributions, the saving of up to 13.8% can be retained by the company. For example, by contributing £1,000 directly into an employee's pension instead of paying the equivalent in salary, the company saves up to £138 in National Insurance.
Pension contributions - How much can an employer contribute?
Unlike personal contributions, employer contributions aren't limited to what the employee earns. A company could contribute more than the employee's earnings - up to the current annual allowance of £40,000, or up to £160,000 in some circumstances if using carry forward.
This is particularly beneficial for controlling directors who often take a small salary and large dividends to benefit from less tax on pension contributions.
Tax Advice on Employer pension contributions
Employer pension contributions tax relief is not automatic. The reason being that it is up to the employer's local inspector of taxes whether or not the employer receives tax relief on pension contributions. To see how tax planning can help you minimise your tax bill speak to our accountants in Grimsby today.
