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Unlocking Maximum Value from Your Business Profits Before Tax Year-End

11 March, 2024

As we approach the close of the tax year, the strategic focus for SME owners like yourself shifts towards maximizing the benefits from your hard-earned profits. With recent tax changes, the traditional preference for dividends now faces a strong contender: pension contributions.

Why Consider Pensions Now More Than Ever?

The increase in corporation tax to 25% amplifies the appeal of pension contributions. Unlike dividends, which are distributed after corporation tax, employer pension contributions are deducted before, significantly reducing your taxable profits. Coupled with the raised annual allowance to £60,000 and the delayed tapering effect at incomes of £260,000, the opportunity for tax-efficient profit extraction has never been better. Notably, the fear of a lifetime allowance charge on your savings is now a concern of the past.

Dividends vs. Salary/Bonus: A Closer Look

While dividends have traditionally offered a tax-efficient route for day-to-day income, the narrowing gap between dividend and salary options, due to the dividend rate increases and allowance cuts, merits a fresh evaluation. Especially when corporation tax rates now vary significantly based on your company’s profits.

The Pension Advantage

Beyond the necessities, considering a pension contribution for surplus profits becomes an astute choice. It stands on par with salary or bonuses as a deductible expense but is free from National Insurance contributions for both employer and employee—a clear advantage over dividends.

For directors over 55, the modern flexible pension not only presents a tax-efficient withdrawal option but also offers 25% of the pension pot tax-free, aligning closely with the tax efficiency of dividends and salary, but without the complexities.

Illustrating the Benefits

Consider £10,000 of gross profits. A pension contribution retains its full value, whereas bonus and dividend options are subject to taxes and National Insurance, significantly reducing their net benefit to you.

Looking Ahead

When it’s time to enjoy the fruits of your labour in retirement, withdrawing from your pension could offer you up to 67% more spendable income as a basic rate taxpayer compared to the bonus route, and even more against dividends.

Final Thoughts

As the tax year draws to a close, reflecting on how to best leverage your company’s profits for long-term benefit is crucial. With the evolving tax landscape, revisiting your strategy could reveal more advantageous paths for profit extraction and retirement planning.

We’re here to help navigate these options and ensure that your decisions align with your financial goals. Let’s optimise your hard-earned profits together.