Paying into a pension from your limited company

If you run your own limited company, there are two ways you can pay into a pension fund, both of which offer significant tax advantages.

You can opt to make personal contributions or make them through the business in the form of company pension contributions.

In this article, we look at the two options, including the tax implications of each, to help you make a more informed choice about providing for your retirement.

Personal pension contributions

When you pay into a pension scheme out of your own income, you’ll receive tax relief based on the income tax band you fall into.

If you’re taxed at the basic rate, for every £80 you pay in, you’ll actually save £100 into your pension.

The tax relief is even greater if you’re a higher (40%) or additional rate (45%) taxpayer.

Currently, there is no limit to how much you are allowed to pay into a pension, however, there is a limit to how much you can invest and still claim tax relief on.

This is currently set at 100% of your earned income; up to £60,000 a year – the Annual Allowance (AA).

For the record, if your income is below £3,600 p.a. you can pay in up to the same amount and receive 100% tax relief.

If you’re the director of a limited company, you can pay yourself a salary as well as take dividends.

Importantly, when it comes to pension saving, only the money you take as income will count towards the amount of tax relief you can claim. Dividends aren’t considered to be ‘relevant UK earnings’ by HMRC.

In other words, if you decide to take a smaller salary and a larger dividend from the company, your tax relief limit will be proportionately low. As soon as you go over your limit, you’ll be hit for tax.

One way to pay more into your pension fund while still enjoying the tax benefits available is to draw a higher salary from the company.

Another way is to pay into your pension through your company in the form of an employer contribution (see below).

Making company pension contributions

Any contributions made by your company count towards your £60,000 annual allowance. This is the maximum amount of pension savings an individual can contribute each tax year and benefit from tax relief.

As all eligible employer pension contributions are an allowable business expense, your company will receive Corporation Tax relief.

This means that your limited company could save a minimum of 19% in tax.

This is the lowest level of Corporation Tax during 2023/4.

The highest rate of tax is currently 25% if your annual profits are £250,000 or more.

Another benefit of paying through the company is that employers aren’t required to pay National Insurance Contributions (NIC) on pension contributions.

If you consider that the employers’ NIC rate for 2023/24 is 13.8%, you could save up to that amount by paying into a pension instead of taking the equivalent as salary.

For the company, the savings could amount to over 30% in total if the money was paid straight into your pension fund and not paid as a salary.

What are carry forward rules?

As tax relief on pension contributions is restricted to the total amount of an employee’s earnings, you may want to use ‘carry forward’ arrangements if you need to make a sizeable pension investment.

The current annual allowance is £60,000, but you can carry forward annual allowances from the past three years to help accommodate a large investment.

Make sure your contributions meet HMRC rules

It’s important to note that any contributions you make have to abide by existing rules to qualify for tax relief.

HMRC states that pension contributions must be made ‘wholly and exclusively’ for purposes of your business or trade.

Generally, this means that an employee’s overall remuneration should be reasonable when you look at the contribution they make to the business. This includes salary, dividends and any other income – as well as pension contributions.

For small companies where the director(s) are also the main fee earners, there shouldn’t be a problem. You should always speak to a tax specialist if you have any questions about making pension contributions from your company.

For more on this specific point, read BIM46030 and BIM46035.

Other things to bear in mind to avoid HMRC scrutiny include:

  • Make sure that contributions from your company to pension funds don’t exceed that year’s annual profits.
  • Makes sure that the value of pension contributions to different employees is proportionate to the contribution they make to the business.

Pension contributions and IR35

It’s also worth pointing out that contributions made through the company are safe from IR35.

For example, if HMRC decided that you’d been operating outside IR35 when in fact you should be classed as inside IR35 for tax purposes, any pension contributions you had made to that point would be deducted from any salary you were due.

Have you got several old pensions?

Many limited company directors have one or more ‘old’ pensions – from previous employers, or perhaps lapsed private pension schemes set up in the past.

There are a growing number of providers in the pension consolidation market. These services enable you to combine your old pensions into one easy-to-manage pension pot.

You should seek professional advice before using these services, as not all pensions are the same. You may be better off leaving older pensions with their current providers, as you may lose some benefits if you move your funds.

The choice is yours

It’s up to you to decide whether or not making employer contributions would be of greater benefit compared to making personal pension contributions.

Hopefully, this article has provided some guidance on a complex issue but remember, the rules on pensions can and do change.

Always seek professional advice before deciding what is the most tax-efficient way to invest in a pension.

If you would like to speak to a professional pensions adviser and discuss all of your options, simply fill in the form below.

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