How do Pension Payments impact on R&D claims?
A number of factors now make it quite attractive for company owner/directors to pay themselves a pension from their company, especially if the director is spending time undertaking R&D.
These include that:
• Pension payments are an eligible part of salary costs for calculating R&D expenditure (see the calculation below).
• Company pension payments are deductible as a company expense (so they reduce your taxable profits and therefore your corporation tax bill (£20,000 into your pension fund will save you £4,000 in corporation tax at the 20% small profits corporation tax rate).
• Pensions are now far less regulated than in the past so, for example, anyone over age 55 can take 25% out of their pension pot interest free and spend the entire pension as they wish.
• All but the first £5,000 in Dividend income will be taxed from 1st April 2016 no matter what tax bracket you are in.
Here is an example of how paying a pension can benefit you if you are a company director undertaking R&D for your company – let’s assume that in the year starting 1st April 2016:
• you plan to spend 25% of your time on R&D projects
• you expect to pay £20,000 from your company into your personal pension fund
• you anticipate your company will make a taxable profit in the year.
The £20,000 pension payment will reduce your company profits by £20,000, saving you £4,000 (£20,000 x 20%) on your corporation tax bill. As 25% of your time is spent on R&D projects, 25% of the £20,000 pension payment (£5,000) can also be claimed as R&D costs, saving you an additional £1,300 in corporation tax (26% of the relevant R&D costs at current rates). Thus the total corporation tax reduction from making the £20,000 pension payment is £5,300, which is 26.5% of the pension payment. If you are aged over 55 you could then immediately withdraw 25% of the pension payment – giving you £4,000 in tax free income regardless of what other personal income you have.
Linda Eziquiel, Director.
Note: All articles in this blog are intended to provide general guidance only. Please contact us for specific guidance for your particular circumstances.