Reasons to make pension contributions from your Limited Company!
26 April 2022
Withdrawing profits from your Company can be costly. If you draw extra profits down as income you will most likely pay 40% Income Tax along with PRSI, USC and Company PRSI.
An alternative and much more tax efficient way of extracting this money is through a Company Pension Plan. There are five distinct tax advantages of taking money out of your Company by way of company pension contributions rather than by extra salary:
- You pay no Income Tax on the contribution made to the pension – a saving of up to 40%.
- There is no Benefit in Kind chargeable to you in respect of this contribution.
- The money accumulated in the pension grows tax free until retirement.
- A tax free lump sum can be taken when you reach retirement (subject to conditions).
- The contributions are treated as a business expense which means they are deductible for Corporation Tax purposes. This allows for a Corporation Tax saving in the Company of 12.5% of the total premiums paid.
Example: Paul owns ABC Limited and draws an annual salary of €50,000 from the company. After paying Paul his salary of €50,000 the annual profits are €100,000. This gives a Corporation Tax bill of €12,500 (12.5%). Paul would like to extract more profits out of the Company without paying the higher rate of Income Tax. In order to do this, he can contribute to a Company Pension Plan. If Paul takes a salary of €50,000 and invests a further €50,000 of the €100,000 remaining Company profits via employer contribution to the Company Pension plan, the Company’s Corporation Tax bill will fall to €6,250 (12.5% of the remaining €50,000 profits). Furthermore, no Income Tax is payable on the €50,000 that is withdrawn from the Company and invested in his own personal pension plan. By investing in a pension, Paul is actually taking €100,000 from his Company, yet only paying tax on his €50,000 salary.
For directors of Limited Companies, making pension contributions from the company is one of the easiest ways to turn company wealth into personal wealth and is something that you should consider doing going forward!
Marie Carr, MSc BBS QFA RPA SIA is a Qualified Financial Advisor, Retirement Planning Advisor & Specialist Investment Advisor. You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on marie@jfl.ie
