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.
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 taking 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, as 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
As employer contributions are an allowable business expense, your company will receive Corporation Tax relief, meaning your company could save a minimum of 19% in tax. This is the lowest level of Corporation Tax during 2023/4.
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 saving could amount to over 30% in total if the money was paid straight into your pension fund and not paid as a salary.
It’s important to note that any contributions you make have to abide by existing rules to qualify for tax relief.
HMRC states that pensions contributions must be ‘wholly and exclusively’ for the purposes of business. To assess if this is the case, HMRC can ask for evidence to see if anyone else in the company is benefitting from this arrangement.
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, and you may be better off leaving older pensions with their current providers, as you may lose some benefits if you move providers.
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, so 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. We have worked closely with the Broadbench team for many years, and have used their services ourselves.