If you're looking to extract profits from your limited company, salary and dividends are the usual way to go. However, it seems that many directors overlook the pension contributions ...
Many tax advisors say a low salary and higher dividends is the way forward, but with taxation being what it is right now, is it time to re-evaluate that thinking?
If you need to extract income from your business regularly, then dividends are still the preferred route; however, the most tax-efficient approach are long-term pension contributions. This is, of course, subject to market performance.
All registered pension schemes can accept contributions, and many can accept them from both the individual and from the company itself. A company can contribute up to £40,000 per year (subject to annual allowances), and if the previous 3 years' allowances were not fully used, a larger top-up contribution could be made.
Company contributions are not subject to relevant earnings where, obviously, individual pension contributions are. High earners may find their annual allowances tapered. One great benefit of pension contributions is that they are not subject to the company making a profit like dividends are. If you make a loss in one year, you can still pay into the pension.
Pension contributions get a full Corporation Tax deduction, and there's no national insurance due either, so if you're concerned about the Corporate Tax rising to 25% over the next few years, then putting more in the pension is a great idea. The only downside to making pension contributions is that you can't access them until you're 55.
Pension fund growth depends on the markets, but also what the directors want the pension provider to invest in. Generally, pensions grow tax-free and are a great way to extract income from your limited company.
If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.