As companies finalise their accounts every year, it is essential to consider employer pension contributions before the deadline.
Businesses whose accounting period ends on 31 March 2024 are in their final quarter, and the time to decide on employer pension contributions is fast approaching.
For an employer pension contribution to be eligible for deduction in the accounting period to 31 March 2024, it must be physically paid before or on 31 March 2024. It is not sufficient to accrue the contribution by way of an accounting entry; it must be paid, not just payable.
Tax Relief. Tax relief on employer pension contributions for trading companies is granted by allowing contributions to be deducted as an expense, provided they are incurred wholly and exclusively for the purposes of the trade. However, when large contributions are made by employers, the relief may not be granted entirely based on the chargeable period but spread over several periods. It is worth noting that these rules apply to every individual pension scheme in which an employer pays, not to the aggregate of contributions to all schemes.
Corporation Tax vs Small Profits Rate From 1 April 2023, the headline corporation tax rate increased to 25% for taxable profits over £250,000. For small companies with taxable profits under £50,000, the small profits rate (SPR) of 19% still applies. However, SPR does not apply to close investment-holding companies. The SPR is not applicable to a company controlled by a small number of people that does not exist wholly or mainly for the purpose of trading commercially or investing in land for unconnected letting.
Marginal Rate Relief For companies with taxable profits above £50,000, they pay the full 25% rate, but where the profits are below £250,000, they receive marginal rate relief. This means their actual rate of corporation tax increases gradually from 19% to something between the small profits rate and the main rate.
This is best explained with a couple of simple examples:-
| ABC Trading Ltd – year to 31 March 2024 | |
| Taxable profits – | £51,000 |
| Corporation Tax at 25% | £12,750 |
| Marginal relief 3/200 x £250,000 less £51,000 | (£2,985) |
| Corporation tax due | £9,765 |
| Effective rate (£9,765/£51,000) | 19.15% |
| DEF Trading Ltd – year to 31 March 2024 | |
| Taxable profits – | £100,000 |
| Corporation tax at 25% | £25,000 |
| Marginal relief 3/200 x £250,000 less £100,000 | (£2,250) |
| Corporation tax due | £22,750 |
| Effective rate (£22,750/£100,000) | 22.75% |
For ABC Trading Ltd and DEF Trading Ltd, taxable profits are £51,000 and £100,000 respectively. If ‘augmented’ profits were higher, that higher figure should be used in the calculation. Broadly, augmented profits are taxable profits plus any exempt distributions received (excluding dividends from 51% subsidiaries).
The corporation tax liability of DEF Trading Ltd is £12,985 more than the corporation tax liability of ABC Trading Ltd. Given the taxable profits of DEF Trading Ltd are £49,000 more than ABC Trading Ltd, then we can calculate that each £1 of profit between £50,000 and £250,000 is taxed at an effective marginal rate of 26.5% (£12,985/£49,000 x 100).
That’s useful to know as it short circuits the corporation tax calculations. Here’s a quick way to do your sums:-
| ABC Trading Ltd – year to 31 March 2024ABC | |
| Taxable profits – | £51,000 |
| £50,000 taxed @ 19% | £9,500 |
| £1,000 taxed at 26.5% | £265 |
| Total | £9,765 |
| DEF Trading Ltd – year to 31 March 2024 | |
| Taxable profits – | £100,000 |
| £50,000 taxed at 19% | £9,500 |
| £50,000 taxed at 26.5% | £13,250 |
| Total | £22,750 |
Directors of companies with taxable profits that are likely to fall in that marginal band can consider paying employer pension contributions on or before 31 March 2024 to reduce taxable profits to £50,000 and potentially benefit from 26.5% corporation tax relief.
Employer contributions have always been tax-efficient, but with the transition to the new corporation tax world coinciding with the increased tax burden on those receiving dividends, there’s never been a better time to ensure that a reasonable proportion of remuneration is a pension contribution.
THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).
THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.