How do company Pension Payments boost R&D?
A number of factors now make it quite attractive for company owner/directors to pay themselves a pension contribution from their company, especially if the director is spending time undertaking R&D.
These include that:
- Pension contributions are an eligible part of salary costs for calculating R&D expenditure (see the calculation below).
- Company pension contributions 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 without becoming liable to pay personal income tax on the withdrawal; and spend the entire pension as they wish, subject to paying personal income tax on withdrawals above the 25% tax free element.
- All but the first £5,000 in Dividend income will be taxed from 1st April 2016 no matter what tax bracket you are in, with the tax free allowamce dropping to all but the first £2,000 from April 2018..
Here is an example of how paying a pension contribution can benefit you if you are a company director – 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.
As 25% of your time is spent on R&D projects, 25% of the £20,000 pension contribution (£5,000) can be claimed as R&D costs, saving you £1,300 in corporation tax (26% of the relevant R&D costs at current claim rates).
The £20,000 pension contribution will also reduce your company profits by £20,000, saving you £4,000 (£20,000 x 20%) on your corporation tax bill – this is regardless of whether you are claiming R&D tax credits.
Thus the total corporation tax reduction from making the £20,000 pension contribution is £5,300, which is 26.5% of your pension contribution (£1,300 of which directly relates to your R&D claim).
If you are aged over 55 you could then immediately withdraw 25% of the pension contribution (under new pension regulations) – giving you £5,000 in tax free income – regardless of what other personal income you have.
There are other factors that you may need to consider, such as compliance with standard pension regulations. We therefore strongly advised that you take professional advice before deciding what is appropriate in your circumstances.
Are you ready to find out if you qualify or how much your R&D claims could be worth?