How to Build Wealth Using Your Company
By Joseph Spiers
Discover how to use your company to build personal wealth through pension contributions, reinvesting profits, and tax-efficient strategies like Corporate Unit Trusts. Learn how to maximise your financial security and plan for a successful business exit with expert guidance.
As a business owner or entrepreneur in the UK, you have a unique opportunity to use your company to build personal wealth in a tax-efficient manner. While salary and dividends are common ways to extract income from your business, there are additional strategies that can significantly enhance your long-term financial security. One of the most powerful tools at your disposal is pension contributions, which offer substantial tax benefits. However, there are other avenues to consider as well, such as investing in your business, using tax-efficient savings vehicles like Corporate Unit Trusts, and planning for your exit strategy. In this blog post, we’ll explore how you can use your company to build personal wealth, with a focus on pension contributions and beyond.
1. Maximising Pension Contributions
Pension contributions are one of the most tax-efficient ways to build personal wealth. As a company director or business owner, you can make contributions directly from your company to your pension, reducing your corporation tax liability while boosting your retirement savings.
Tax Benefits of Pension Contributions
- Corporation Tax Relief: Contributions made by your company to your pension are treated as a business expense, reducing your company’s taxable profits and, consequently, its corporation tax bill. For the 2023/24 tax year, the corporation tax rate is 25%, meaning every £1,000 your company contributes to your pension saves you £250 in corporation tax.
- No National Insurance Contributions (NICs): Unlike salary payments, which attract National Insurance Contributions, pension contributions are exempt from both employee and employer NICs. This makes pension contributions a more tax-efficient way to extract value from your business compared to salary.
- Personal Tax Relief: Contributions to your pension are not counted as part of your taxable income, which can be particularly beneficial if you are a higher-rate or additional-rate taxpayer. This means you can potentially lower your personal tax liability while increasing your pension pot.
Annual Allowance and Carry Forward
For the 2023/24 tax year, the annual allowance for pension contributions is £60,000. This is the maximum amount you can contribute to your pension each year without incurring a tax charge. However, if you have not used your full annual allowance in the previous three tax years, you can carry forward any unused allowance to the current tax year. This can significantly boost the amount you can contribute in a single year.
Example:
Let’s say you have not made any pension contributions in the last three years, and your company has generated substantial profits this year. You could potentially contribute up to £180,000 to your pension (£60,000 annual allowance + £120,000 carried forward from the previous three years). This contribution would reduce your company’s taxable profits by £180,000, saving you £45,000 in corporation tax (at the 25% rate), while simultaneously boosting your personal pension pot.
2. Beyond Pension Contributions: Other Wealth-Building Strategies
While pension contributions are a cornerstone of personal wealth-building for business owners, there are other strategies you can use to grow your wealth through your company. These include investing in your business, utilising tax-efficient…