Let’s be clear I am a serious advocate of pension contributions by SME owner managers- but the increase in Corporation Tax from 19% to 25% (19% to 26.5% between £50,000 and £250,000 profit) makes me question whether it is better to not make contributions in 2022, but make more in 2023 (including any unused 2022 allowance). With a 6% increased Corporation Tax benefit of contributions in 2023, compared to 2022, what IFA can “guarantee” 6% growth, after costs, over a 12 month period?
Then there is the question of the freeze on the lifetime limit for an individual’s pension pot. At just over £1,070,000 this will seem a lot for most individuals but for a competent advisor with a good investment strategy and an annual limit of £40,000 this can probably be reached in around 15 years! The moto has always been to start early as this allows for annual compounding of growth, and in essence this still has to be a good rule. But you have to maximise the value of each contribution (in the tax credit received) on putting the money into the pension – 2022 19%, 2023 25%.
This issue will again hit IFA’s ability to earn initial income in the period up to 1 April 2023 (or more accurately in the 12 months up to any company’s accounting period including 31 March 2023). Having suffered a similar problem in lack of new investments in the last 12 months due to the Covid 19 effect, are IFA firms going to suffer a second year of lower investments within a 3 year period? And what can you do about it?
Where Are Investments Coming From?
Firstly, let’s concentrate on where your new investments come from. Many IFA’s have a high proportion of their investments that are either non pension contributions i.e. direct investments or are pension contributions that are paid personally. These should not be affected and should be an area of concentration in 2022.
Let us also not lose focus on the benefits of using annual ISA allowances, as mentioned above the Pension Allowance is finite! For many who can afford to save heavily into pensions the income they can get from their pension pot will not be enough. You already know the value of ISAs to build up assets and non taxable income! Is 2022 a year when this becomes more of a focus for those that would otherwise make company pension contributions? Or do you get them to invest (within the company), in the same investment mix as you would do in your pension, and then use these assets as a pension contribution when the Corporation Tax deduction(benefit) has increased?
And, just a slight side issue, do you have clients whose employment package goes into their company Research & Development (R&D) Tax claims? It would appear that the benefit of R&D Tax credits is also going up because as Corporation Tax rates go up so does the benefit of a R&D tax claim. A higher package including increased pension contributions could just give 2 benefits: reduced tax on the contributions and an
increased R&D claim, reducing Corporation Tax a second time!
Is it time to get creative, 2022 may be the time to look at where your client investments come from and potentially to do things differently. Certainly it is time to talk to your business owner clients and show them you are ahead of the game with your thinking.
Written by Bill Douthewaite