Mitigating Corporation Tax rates with an SIPP
According to HMRC, around 1.5 million companies paid Corporation Tax in the financial year up to 31st March 2022 – but only 7% of these exceeded the small profits threshold of £50,000 a year.
Though less than 100,000 companies are likely to face the marginal rate of Corporation Tax at 26.5%, which applies to profits between £50,000–£250,000, these will mostly be owner-managed companies keen to mitigate the increased tax.
As an example, a company with year-end profits of £200,000 will have a Corporation Tax bill that’s £11,250 higher this year than the previous year.
One approach that could help company owners to mitigate the impact of this tax increase is a self-invested personal pension or SIPP – and here’s how.
Director’s SIPP (Self-Invested Personal Pension)
An SIPP is similar to a standard personal pension, as it is a registered pension scheme that allows an individual to save and invest to build up a retirement fund.
The difference is that an SIPP offers a greater choice of investments – including company shares, collective investments, trusts, and sometimes commercial property – which the individual can make changes to whenever they like.
Even if a company director was previously not in favour of sizeable pension contributions, there may now be a strong case for doing so through an SIPP:
- Making the maximum £60,000 investment could save £15,900 on a 26.5% Corporation Tax bill
- The director can withdraw 25% of the pension fund tax-free when they reach 55 years of age
- If the tax eventually paid on withdrawals is lower than 26.5%, there will be an overall tax saving
Income Tax relief is available on SIPP contributions, depending on the individual’s tax band, though there are annual limitations on how much you can contribute and how much tax relief you can claim. SIPPs also affect annual allowances and lifetime allowances.
However, even if there isn’t an overall tax advantage, there is still the benefit of timing – cutting the Corporation Tax bill for the current financial year and deferring the tax cost until the director claims their pension income from their SIPP.
Mitigating cost and risk with an SIPP
Anyone in the UK under 75 years old can start an SIPP – and there isn’t an age limit for transferring funds from other personal pensions into an SIPP.
If you aren’t sure whether an SIPP would be beneficial for you as a company owner or director, this basic guide to SIPPs could help you to make up your mind.
Annual maintenance costs can be kept to a minimum by choosing a low-cost SIPP provider, and if retirement isn’t that far off, exposure to stock market volatility can also be minimised by investing in fixed-term cash deposits.
SIPPs are typically most suitable for those with an understanding of financial markets, who are prepared to research and actively manage investments responsibly.
Alternatively, you could consult a qualified financial adviser for professional advice on SIPP suitability and investment fund management.