If you own a limited company, contributing to a pension can bring significant tax advantages. Pension contributions can be treated as an allowable business expense and offset against your company’s corporation tax bill.
If you run your own business that’s incorporated as a limited company, you can either make personal contributions to a pension or through your company with both options bring tax advantages.
The right option for you depends entirely on your individual circumstances.
Personal Pension Contributions
When you pay money into your pension, you receive tax relief that reflects the rate of income tax you pay. This means that, as a basic rate taxpayer, This means that, as a basic rate taxpayer, you effectively only pay £8 to save £10 into your pension.
Although there’s no limit to the amount you can pay into your pension, there are limits to the amount you can contribute and still receive tax relief. The limit is currently 100% of your income, up to a maximum of £40,000.
If you earn less than £3,600 annually or don’t earn anything, the maximum amount you can contribute to your pension within the tax relief limit is £3,600 (including government tax relief)
As a limited company owner, making personal contributions into a pension has no National Insurance Contribution (NIC) savings. Personal pension contributions are made after NIC has been deducted from you salary.
Making personal pension contributions as the director of a limited company
If you own a limited company and you take both salary and dividends, the dividends don’t count as ‘relevant UK earnings’, therefore, the amount of salary you take as income will be used to calculate your pension tax relief limit.
Therefore, if you take a small salary and a large dividend from your company, your pension tax relief limit will be low. If you exceed your limit, you will face tax charges.
To overcome this, you can either increase your salary or make the pension contribution straight from your company as an employer contribution.
Making employer pension contributions directly from your limited company
Your limited company can contribute pre-taxed company income to your pension. Because an employer contribution counts as an allowable business expense, your company receives tax relief against corporation tax, which means the company could save up to 19% in corporation tax.
Your contributions must abide by the rules for allowable deductions. The rules state that the pension contributions should be ‘wholly and exclusively’ for the purposes of business. To figure out whether this is the case, HMRC look for certain evidence; for example, whether other employees are receiving comparable remuneration packages.
Another benefit is that employers aren’t required to pay National Insurance on pension contributions. The National Insurance rate for 2021/22 is 13.8%, therefore, by contributing directly into your pension rather than paying the equivalent in salary, you save up to 13.8%.
This means that in total, your company can save up to 32.8% by paying money directly into your pension rather than paying money in the form of a salary. In addition, you won’t be required to pay employee National Insurance on the contribution into your pension.
Depending on your circumstances, this may or may not be more beneficial to you than paying personal pension contributions.
If you'd like to know more information on the best options for you, then feel free to contact us.