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  • Writer's pictureBrian Pusser

Slash Your Copmany's Corporation Tax Rate With Pensions

Updated: Aug 1, 2023

The main corporation tax (CT) rate increases to 25% in April 2023. But how might your company use the higher rates to its advantage by paying extra pension contributions for its directors?

Tax Rates

From 1 April 2023 a higher corporation tax (CT) tax applies to the whole of a company’s profits if they exceed £50,000. If a company has an associate the limit is proportionately reduced for each. One way to mitigate the higher CT is for your company to pay employer pension contributions for its directors.


Not only do these qualify for CT relief but they don’t count as directors’ income for tax or NI purposes. This makes them very tax efficient.

Normally, expenses are only tax deductible where they are “wholly and exclusively” paid for the purpose of a company’s trade. The good news is that HMRC says that this limitation is rarely an issue where pension contributions are paid by a company for one or more of its controlling directors. However, large employer pension contributions for non-controlling directors may be disallowed.

Timing your contributions A slight catch is that a deduction for pension contributions is only allowed for the accounting period in which they are paid. This means if your company wants to reduce its CT rate for an accounting period it needs sufficient funds so it can pay the contributions before it ends. It will also need accurate management accounts to estimate its profit to make sure the contributions are set at a level to maximise tax efficiency. Relief for employer contributions exceeding £500,000 can be very delayed.

Example. Acom Ltd has one associated company. Its management accounts for the year ended 31 March 2024 project a taxable profit of £35,000, making it liable to higher CT rates. It can, however, avoid them by paying an employer pension contribution of £10,000 no later than 31 March.

Limited tax relief While your company can pay any amount to a pension scheme for you, the annual allowance (AA) limits the tax-efficient amount to £40,000 per tax year, including contributions you personally pay. Any more can lead to an additional tax charge. There is a let-out if the AA hasn’t been fully used in the previous three tax years. The unused AA can prevent an additional tax charge where an individual’s total contributions exceed £40,000 in a year.

Reduced in CT rate Having calculated and paid what you hope is a tax-efficient contribution, what effect will it have on your company’s CT rate? The table below shows an example for a company with one subsidiary for its financial year ending 31 March 2024: No pension (£)With pension (£)Taxable profits80,00080,000Less employer pension contribution-55,000Taxable profits80,00025,000CT at 19% on first £25,0004,7504,750CT at 26.5% on any balance14,575-Total19,3254,750Effective CT rate24.2%19%

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