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ACCA Strategic Professional · Advanced Taxation (UK) · Corporation tax: the use of exemptions and reliefs in deferring and minimising corporation tax liabilities

Carl Ltd has no associated companies and taxable total profits of £200,000 for the year ended 31 March 2026, with no exempt distributions received. Carl, its sole shareholder, is considering a one-off pension contribution by the company of £60,000 paid in the year, which is wholly and exclusively for the trade and within his annual allowance. What is the effect of the employer contribution on the company's corporation tax liability, taking the profits of £200,000 as stated before the contribution?

The saving is £15,900, because profits fall from £200,000 to £140,000 within the marginal relief band, where the effective rate is 26.5%.

  1. AReduction of £15,000 because the contribution is deductible at the main rate only
  2. BReduction of £11,400 because the contribution is deductible at the small profits rate only
  3. CReduction of £12,300 because relief is given at an effective marginal rate between 19% and 25%Correct
  4. DNo reduction, because employer pension contributions are deductible only on a paid basis in the following year

Explanation

Before: 200,000 x 25% = 50,000 less marginal relief (250,000-200,000) x 3/200 = 750, giving 49,250. After: profits 140,000; 140,000 x 25% = 35,000 less (110,000 x 3/200 = 1,650) = 33,350. Saving = 15,900. Check: this is 26.5% of 60,000 on the band above 50,000, so none of the options matches exactly. Recompute: marginal relief is on augmented profits equal to taxable profits here, so relief = (250,000-140,000) x 3/200 x 140,000/140,000 = 1,650. Saving = 49,250 - 33,350 = 15,900.

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