High earning business owners can significantly increase their ability to make pension contributions by making small changes to the timing of dividend distributions from their personal company.
Individuals with high income can have their annual allowance for pension contributions severely restricted, which limits their ability to take advantage of the generous tax reliefs that apply to pensions. However, if those individuals have their own business and they can influence the timing of their taxable income, careful planning can dramatically increase the tax relief available.
The annual allowance for tax relievable pension contributions increased from £40,000 to £60,000 from the tax year 2023/24. Unused allowances from the previous three years can be brought forward.
The annual allowance is abated by £1 for every £2 that an individual’s adjusted income (that is, broadly speaking, taxable income plus employer pension contributions) exceeds £260,000. That increased from £240,000 from 2023/24.
The minimum allowance from 2023/24 is £10,000 which represents an increase from £4,000 in previous years.
Someone with adjusted income of £360,000 or more will have the maximum reduction applied to their annual allowance, so they can only make tax relievable pension contributions of up to £10,000 in 2023/24 and £4,000 in prior years.
Let’s say an individual operates through their personal company, making annual post tax profits of at least £500,000 from which they extract £500,000 every year as dividend income. They typically declare one annual dividend on 5 April, which is their only source of personal taxable income.
The annual taxable income of £500,000 means they have only been able to make £4,000 contributions in recent years, and they believe they will only be able to make annual contributions of £10,000 following the relaxations from 6 April 2023.
However, by altering the timing of their dividends by just a single day every other year, they will be able to make the maximum tax relievable pension contributions of £60,000 from their company every other tax year.
This can be illustrated over four years as follows:
| CURRENT POSITION | WITH PLANNING | |||
| Dividend | Employer pension contribution | Dividend | Employer pension contribution | |
| 2023/24 | ||||
| 05-Apr-24 | £500,000 | £10,000 | £200,000 | £60,000 |
| 2024/25 | ||||
| 06-Apr-24 | £300,000 | |||
| 05-Apr-25 | £500,000 | £10,000 | £500,000 | £10,000 |
| 2025/26 | ||||
| 05-Apr-26 | £500,000 | £10,000 | £200,000 | £60,000 |
| 2026/27 | ||||
| 06-Apr-26 | £300,000 | |||
| 05-Apr-27 | £500,000 | £10,000 | £500,000 | £10,000 |
| TOTAL | £2,000,000 | £40,000 | £2,000,000 | £140,000 |
In summary
With this simple planning around the timing of dividend distributions, the individual can create an opportunity increase their tax relievable pension contributions from their personal company by up to £25,000 per annum.
To discuss your own situation please get in touch with Angela Keery, Head of Tax E: angelakeery@bakertillymm.co.uk T: 028 9032 3466
This article first appeared on www.mha.co.uk