New HMRC statistics have shed some light on how many companies are affected by the recent hike in corporation tax rates. Just over 1.5 million companies paid corporation tax for the financial year to 31 March 2022, but only 7% fell above the £50,000 small profits threshold.

Although fewer than 100,000 companies are likely to be facing the 26.5% marginal rate of corporation tax where profits fall between £50,000 and £250,000, they will be mainly owner-managed companies with owners keen to mitigate the tax increase.

For a company with a 31 March year-end and profits of £200,000, this year’s corporation tax bill is going to be £11,250 higher than last year.

Director’s self-invested personal pension (SIPP)

If you are a director and you have not previously been in favour of making sizable pension contributions, there can now be a compelling case to do so now.

  • With a marginal tax rate of 26.5%, investing the maximum £60,000 into a SIPP will save corporation tax of £15,900.
  • Once you reach the age of 55, 25% of the pension fund can be withdrawn tax-free, but virtually immediately if you are already 55.
  • There will be an overall tax saving if the tax rate eventually paid on pension withdrawals – taking into account the tax-free element – is less than 26.5%.

Even if there is no overall tax advantage as such, there will still be a timing benefit. The current year’s corporation tax bill is cut, but the tax cost does not apply until you, as a director, receive your pension income.

Mitigating cost and risk

By choosing a low-cost provider, the annual cost of maintaining a SIPP can be kept to a minimum.

If you are a director and you are only a few years from retirement, you might not want to be exposed to stock market volatility. This risk can be avoided by investing in fixed-term cash deposit accounts.

A basic guide to SIPPs can be found here.

How can we help?

Contact us on 01444 716946 or on 01273 963656, or email us here to find out more about the tax advantages of having a Director’s SIPP.