Accumulate Profit or Pay into a Company Pension?


Many business owners think leaving profits in the company to accumulate and taking the profits as a capital amount later is best, but by extracting some of them as employer pension contributions, you might save tax.

Historically there’s been a tax advantage to leaving profits in your company to build up as a lump sum. In this situation you then pay capital gains tax of 10% on the first million and 20% on any excess.

This compares favourably to income tax rates if you drew profits as a salary, dividend, or benefit, with rates ranging from 8.25% to 45% plus national insurance (NI). However, is accumulating profit in this way better than extracting some of the profits as employer pension contributions?

The plus side of pension contributions are that the company gets corporate tax relief for them, and you don’t need to wait until you exit your business to get money from your pension fund, you only need to reach 55 (56 after 6 April 2028) and the money grows tax free. But how does this compare to leaving profits in the company?

Pension Fund versus Money Left in a Company

One way to look at things is to compare tax positions of a pension fund versus money left in a company. Let’s do some basic calculations using some usual assumptions. First assumption, the tax regime doesn’t change, apart from the higher corporate tax rate which comes into effect on April 2023. Second assumption, any tax relief for pension contributions is paid into the pension fund.

The outcome of our calculations on company profits paid into a pension are – when you draw from it you are only liable to basic rate income tax, you save tax compared to accumulating the profits and taking as capital. Other advantages are that you don’t have to wind up the business to draw money from your pension fund and it grows tax free in a pension fund.

Let’s Talk

For help illustrating your own unique position regarding this, contact our tax team who will be happy to help you discover the best option for you, let’s talk.

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