Attention Business Owners.......Should you delay paying into your pension until April 2023?

I would like to think that most business owners are aware that corporation tax goes up in April 2023, (Massive covid bill to pay back and all that). However it also appears most people haven't thought through the planning points that this brings about with regards to Pensions and Investments held within the company.

This article addresses the pensions side of the coin, (Investments to follow - watch this space in anticipation!)

Either as a company owner paying into their own pension or an employer paying into the employees pension, company payments into pensions are made gross. What that means is that you claim back corporation tax against the payments in your annual tax return. This is different to personal pension payments (not salary sacrifice), where the payments to a personal payment are paid net of tax relief.

How does this work?

If a company pays ￡100.00 into a pension, and the company normally pays 19% corporation tax, then at the end of the year it puts the ￡100.00 as a company expense and saves the 19% corporation tax on the payment. Therefore costing the company ￡81.00. Its a tax relievable payment (subject to certain rules).

If you make a personal payment into a pension, you would physically pay ￡80.00, the Pension company would top it up by ￡20.00 and they would claim the ￡20.00 back from the revenue. If you are a higher or additional rate taxpayer its your job to reclaim the extra tax relief in your self assessment at the end of the tax year.

So what's changing and why is it relevant?

Corporation tax is going up. Not only is it going up but its going back to the old way of calculation by using a taper (for those of you like me whom remember that......ahhhhh its all coming back to you now? Delightful wasn't, cue the call to the accountant).

See below

Ok so what..... well, if you are an employer and you are paying workplace pension contributions or monthly contributions then there isn't much to do or think about. Those will continue.

But if you are like a lot of our clients, who as business owners, wait until Feb/March and make a lump sum into the pension before the end of the tax year, should you be waiting until the 6th April to do so?

Why? Because in basic terms if you pay it on the 5th April you'll save 19% tax and if you pay it on the 6th you'll save up to 26.5% tax. Makes sense.

But.....

1. What about fund performance?

Well its no secret the markets are down now in comparison to this time last year, are very volatile and it's likely to be a tough winter. So yes, in theory you would miss out on 9 months of fund performance and as no one can predict the markets going up or not, this is personal preference and only a decision you can make. The markets could also fall further and you'll have a double whammy of extra tax saving and going in to the markets lower next year. Grabbing the crystal ball as we speak.....

2. What if the company hasn't got the profits next year?

The company has to be able to fit within the 'wholly and exclusively for the purposes of trade rules' before making a contribution so check with your accountant about ensuring there are profits to offset.

3. We might have spent the money elsewhere?

If thats a risk then I would pay it in now. You cannot put your pension payments on the back burner forever as forever will suddenly be here and it'll be too late. Pay your future self first by ensuring your pension payments are done whatever the tax outcome. Don't let the tax tail wag the dog as they say.

4. What about split accounting over financial years......

Thats not so simple, the accounting year and the timing of the payment (not just the tax year) has an effect as well so ensure you speak to a tax adviser to make the most of your pension payment.

It's a tough one and only you can decide whats right for you, your business and your financial future but hopefully this article gives you something to think about. Don't leave it until April to consider as it'll be too late to make an informed decision.

Sarah Hogan

Chartered Financial Planner and Company Director.

The value of your investments can fall as well as rise and you may not get back the full amount invested. Specific risks associated with a particular product will be included in the product documentation.

KBA FS Ltd does not provide tax advice, you must check this with your own tax adviser. This is not advice it is for information only purposes.