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25% corporation tax rate "is definitely impacting SME directors' pensions contributions"

ended 11. September 2024

IFAs and accountants have warned that the current rate of corporation tax is resulting in more SME directors reducing their pensions or not paying into them at all, as more companies grapple with what Ed Stittle, a Chartered Accountant at ESDG Accountancy Ltd, says is a “cashflow pinch” caused by the new 25% rate.

David Stirling, Independent Financial Advisor at Mint Mortgages & Protection commented: "The new corporation tax structure is definitely impacting SME directors' pensions contributions. Some are pausing contributions while they overcome the effects of this "bump in the road".

Meanwhile, Louis Glasser, a financial advisor at Autus Wealth Management, said: “Many of my clients who are either company directors or owners are hesitant to make large contributions to pensions. They see their business as part of their retirement planning and, as such, feel as though they will achieve a greater return by keeping money in the business and funding expansion.”

Newspage asked experts whether the harsher corporation tax climate is making it harder, or impossible, for SME directors to save for their futures — and also if SME directors put enough into their pensions or they tend to gamble on an exit being their main strategy for retirement. Their thoughts can be found below. 

11 responses from the Newspage community

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David Stirling
Independent Financial Advisor at Mint Wealth
The new corporation tax structure is definitely impacting SME directors' pensions contributions. Some are pausing contributions while they overcome the effects of this "bump in the road". We have also seen more older customers avail themselves of their 25% tax-free cash. Whether we eventually see these customers restart their contributions is uncertain, as is the general feeling among SME owners who cannot see the wood for the trees in some cases. What we do need to see is some incentives for SMEs to come back from this.
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Louis Glasser
Financial Advisor at Autus Wealth Management
Many of my clients who are either company directors or owners are hesitant to make large contributions to pensions. They see their business as part of their retirement planning and, as such, feel as though they will achieve a greater return by keeping money in the business and funding expansion. I know, from first-hand experience of talking to SME owners, that they feel as though the corporation tax increase is hindering growth potential and seen as unfairly punitive.
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Ed Stittle
Practice Owner & Chartered Accountant at ESDG Accountancy Ltd
Pension contributions are often one of the most effective and simplest tax planning tools for SME directors, however we often see they are overlooked due to lack of cashflow or knowledge. The new 25% corporation tax rate and recently increased pension annual allowance of £60,000 has meant even more tax relief than ever is available from making pension contributions, but that doesn't help if there is no spare funds to do anything with it. Entrepreneurs are notoriously known for reinvesting their surplus profits and rely on a profitable exit to fund their retirement. The risk of this strategy failing is now only heightened due to fears over the Labour government making significant increases to the capital gains tax rate and removing Business Asset Disposal Relief (formerly, and more aptly, known as "entrepreneurs' relief"). Many business owners have accelerated their sale and retirement plans to ensure they achieve this.
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Mark Scott
Director and IFA at Positive Advisers Ltd
I have clients who I prod regularly to either start or increase their pension contributions and get the phrase back, "My business is my pension." I've seen many SME directors retire and not achieve what they had hoped for their business. Large lump sums are less common, with an income share for a few years being more prevalent. This places the retiring director in a state of nervousness. I have noticed an increase in wealthy clients calling to discuss pensions to avoid what they believe will be a brutal change to inheritance tax in the Autumn Budget.
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Graham Wells
Founder and Financial Coach at GroWiser Financial Coaching
When I begin working with small business owners, particularly directors of their own companies, they generally fail to see the positive connection between pension contributions and corporation tax. And who can blame them? This is an essential element of personal finance that's not taught in school. Pension contributions are generally a tax deductable expense, so an increase in corporation tax rates should not affect net profits or cashflow. Unfortunately, in my experience, most small limited company owners are not aware of the incredible tax efficiency of pension planning. It leads to less corporation tax, less employer and employee national insurance, and less personal income tax. Potentially, less inheritance tax (IHT) too, as pensions sit outside of IHT calculations. Many owners hope the sale of their business will fund their retirement, but it's a risky strategy. Pension contributions can help balance out that risk.
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Rebecca Penny
Managing Director at Planit Financial
Savvy business owners will recognise the opportunity to reduce corporation tax via pension contributions and will do so where the opportunity arises. For those just on the edge of higher corporation tax, this can even reduce the rate the business is subject to as pensions are pre-profit items. In my experience, due to the inheritance tax advantages I still see many owners maxing out their pensions, some even backdating contributions. The clever ones are also doing it for spouses where funds allow and, in family businesses, it's part of a wider planning exercise for other family members, too. Exit is not always on the radar, whereas saving tax is and pensions at the moment offer a nice way to do this. I don't think we will see this change, well, certainly not before 30th October.
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Gabriel McKeown
Head of Macroeconomics at Sad Rabbit - Substack Newsletter
The golden goose of small business retirement planning may be running out of eggs, with SME directors facing a pension squeeze as increased corporation tax bites. The recent hike to 25% is not just eating into profits; it's potentially jeopardising the long-term financial security of those at the helm of Britain's economic engine. Traditionally, pension payments have been an attractive way for directors to extract value from their businesses while enjoying tax relief. However, the higher tax rate is making this strategy less viable for many. Coupled with inflation still above target and interest rates at a 15-year high, SMEs are operating in a challenging environment. This cashflow squeeze is having a ripple effect on contributions, underscoring the crucial need for a comprehensive approach to supporting directors' long-term financial planning. With more uncertainty on the horizon surrounding the autumn statement, the pension time bomb for SME directors is ticking louder than ever.
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Ross Lacey
Director & Independent Financial Adviser at Fairview Financial Management
We work with a number of business owners and higher corporation tax has actually made it more compelling for them to make pension contributions. For those who are already drawing sufficient amounts from their business to fund their lifestyle, rather than building retained profits within the business that have had 25% tax taken off, they are putting this into their pensions. Business owners are also even more keen to understand other ways to reduce their tax bills and how they can fund things like life insurance through their business rather than paying for it personally from taxed income.
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Anita Wright
Independent Financial Adviser at Ribble Wealth Management
In my experience, while the new 25% rate does put additional strain on cash flow, many SME directors still recognise the long-term benefits of contributing to their pensions. That said, some directors may temporarily reduce their contributions as they navigate the challenges of the current tax environment. Ultimately, it depends on the specific financial situation of each business. In general, my business clients use pensions as their primary planning tool for the future. They understand the importance of balancing long-term savings, reducing tax liabilities, and taking advantage of the benefits pensions offer. Relying solely on the eventual sale of a business as a retirement plan is risky, as not all businesses will have a saleable value. This is especially true for SMEs, where business valuations can be unpredictable. Over-reliance on a business sale as a retirement strategy may be prevalent where SME directors are not receiving financial advice and simply don’t know any different.
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Daniel Wiltshire
Actuary & IFA at Wiltshire Wealth
The pension contribution profile of SME directors differs from your average employee. In the early years, when they're trying to get the business off the ground, they often stop making contributions altogether. Once the business is profitable they can then catch up by maxing out their allowances. This is now particularly advantageous, especially for businesses with profits between £50,000 and £250,000 who are now subject to a marginal Corporation Tax rate of 26.5%.
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Bev Wakefield
Director at Vibrant Accountancy Limited
Are the corporation tax rates crippling for small businesses? Yes! But, with corporation tax rates on the rise, now’s the perfect time for SME directors to top up their pensions. It’s a smart way to cut your tax bill and set more aside for the future. While many owners see their business as their pension, it’s important not to put all your eggs in one basket, and ensure you've got the best extraction day to day, too.