As a company approaches its trading year end, many accountants are tasked with exploring ways in which they can legitimately reduce corporation tax.
Here at Novus Wealth Management this is a common scenario and, through our specialist expertise and professional network, one we are well-positioned to advise on.
An option that is sometimes overlooked is the capabilities of using a pension to achieve this, not only by simply paying in a larger contribution, but by offering up other opportunities such as the flexibility to purchase commercial property that can benefit the business in the process.
Here we take a look at how it can work in action.
Mr and Mrs Smith, both 45, own a profitable furniture business – Sofas4All - that looks set to achieve profits of £1m by its 2019 year end in May, meaning a corporation tax bill of £190,000 based on the main rate for the 2019/20 tax year.
Its showroom and headquarters in a North-East town are currently owned by a local landlord.
They have healthy pension pots of £300,000 each.
The pair are looking for ways to legitimately reduce the business’ corporation tax liability, invest in their business and the future.
One way to reduce corporation tax within a business is for it to make pension contributions for the owners or directors within the given annual allowances.
Mr and Mrs Smith are the sole directors and owners of the business.
They have been advised to transfer their current pensions to a SSAS (Small Self-Administered Scheme) meaning both of their pensions will combine into one pension scheme.
The couple have each made £40,000 employer funded pension contributions before their company’s trading year end in May 2019, reducing their business’ profit by £80,000 - and therefore corporation tax by £15,200.
But the benefits don’t end there.
They have also decided to purchase the Sofas4All headquarters and showroom – valued at £650,000 - using their SSAS.
This means that Sofa4All will effectively lease their premises from their own SSAS rather than a third party landlord.
In owning the property through their pension, they have more control over their future and will stand to benefit from the rental income received and any capital appreciation.
For Mr and Mrs Smith the benefits are clear – reducing corporation tax through pension contributions, ringfencing their company's premises against potential business risks and also building on their existing pensions to help achieve a better standard of living in retirement.
The SSAS pension fund can also be passed on in the event of death to their nominated beneficiaries.
Here at Novus Wealth we can advise on the options available to business owners given that this is a complex area of pension planning which requires specialist financial planning.
For tailored advice contact us on 01740 667099 or email firstname.lastname@example.org