Pension profit extraction is a tax efficient long term strategy.
A pension scheme is a managed fund into which tax-relieved contributions are paid by individuals and employers. The contributions are invested by the fund managers so as to grow and create a pot of money that can be accessed by the individual once they reach the minimum pension age (currently age 55) in order to fund their retirement.
Pension contributions are a tax efficient way of extracting profits from a company, as long as immediate access to the funds is not a high priority. Contributions to a pension fund are deductible expenses for the company, so no tax is payable by the company, but the individual cannot access the funds within their pension until they reach retirement age.
Early access can incur significant tax charges as a claw-back of the tax relief obtained on the contributions, so it is important that this is understood before using pension contributions as part of a profit extraction strategy.
Individuals can have a total of £40,000 of contributions (employer and individual) per tax year, after which tax relief is withdrawn, although any unused allowance from the previous 3 tax years can be used up. Once an individual begins to access their pension, this annual allowance is reduced to £10,000 to prevent abuse of the new flexible access rules for pensions.
If you would like more information regarding the tax implications of pension payments or remuneration strategy, please email firstname.lastname@example.org or call us on 01962 856 990.
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