“While the new dividend rules will mean a tax cut for some individuals, those whose earnings are slanted towards company dividends could find themselves worse off. Steve Moy, wealth management consultant at St. James’s Place, comments.
Many directors with cash held in retained profits have recently been bringing forward dividend payments to before 6 April 2016.“However, by viewing the pension contribution as a business expense, those who own limited businesses can pay a pension contribution from the business for their own benefit.
“By moving the cash into a pension, the profits of a company can be reduced, which in turn can lower or eliminate liability to Corporation Tax. Moreover, pension contributions avoid National Insurance Contributions (NICs) and tax that would be payable on dividends. “The pension freedoms introduced in April 2015 mean that a pension can be drawn flexibly from the age of 55. If you are approaching, or have passed this age, you will be able to take the whole fund back and use the cash as you wish, subject to Income Tax.
“You can add up to £40,000 to your pension this tax year using pre-tax profits from your business. If you have not made a pension contribution this tax year, or in the previous three, you could also use the ‘carry forward’ rule to add up to £180,000 to your pot. By taking it from the business, not only will you have reduced your company’s liability for Corporation Tax, you will have also saved Income Tax, including on dividends, and NICs on those contributions.
“Contributions of £180,000 made into a personal pension could result in a Corporation Tax saving of £36,000 (assuming a Corporation Tax rate of 20 percent). But it is important to note that contributions will need to be paid before the company’s financial year-end in order for businesses to qualify for the deduction. In many cases, the deadline will be 31 March 2016.”
Please note that the information contained in this article does not constitute investment advice. Full advice should be taken to evaluate risks, consequences and suitability of any prospective investment.