Making pension contributions from your limited company

9th October 2019 | Retirement

Good retirement planning is something every business owner should consider carefully.

Paying into a pension plan secures your future and makes good business sense too.

If you run a limited company, it’s important to understand the regulations governing pension contribution. There are two ways you can contribute to a pension fund and receive tax relief on your contributions.

Firstly, you can make personal contributions to a pension and secondly you can make contributions through your company. These options have different tax implications and you may want to talk to a financial adviser to see what is the best option for your circumstances.

However, here is a summary of the tax advantages and implications of the two options.

Personal pension contributions

Whenever you make a personal pension contribution you will receive tax relief. The amount of tax relief you receive will depend on the rate of income tax you pay. So, as an example, if you pay the basic rate of tax, you effectively save £125 into your pension for every £100 you contribute.

There are limits to the amount on which you can receive this tax relief. So although you can pay as much as you choose into your pension plan you will only receive tax relief on a certain amount. The current limit is 100% of your income up to a maximum of 40,000

If your annual earnings are £3,600 or below, then the maximum amount on which you can receive tax relief will be 3,600.

You should bear in mind that dividends do not count as ‘relevant UK earnings’ for pension tax relief purposes. This means that only the money you take as income will be used to calculate the tax relief on your pension. So, if you take a large dividend from your company but a small salary the amount of tax relief you receive on pension contributions will be low.

There are two ways around this situation. Firstly, you can, of course, increase your salary. Alternatively, you can make the pension contribution straight from your company as an employer contribution.

Making employer pension contributions directly from your limited company

Contributing to a pension directly from your limited company can offer significant tax advantages. This is because pension contributions are an allowable business expense and can, therefore, be offset against your company’s corporation tax. This could save you up to 19% in corporation tax.

In addition, employer’s don’t have to pay National Insurance on pension contributions. This means that contributing to your pension, rather than paying the amount as salary can save you up to 13.8%. So overall your company may be able to save 32.8% by paying directly into a pension rather than paying money in the form of a salary.

The rules that govern employer pension contributions are a little more complex than those that cover personal pension contributions so it is well worth talking to a financial adviser to assess whether this is the right path for you and your business. In particular, you must ensure that your contributions abide by the rules for allowable deductions.

The way you pay your pension contributions will depend on your particular circumstances. However, given the amount of money you can save it’s worth getting it right. If you are not sure which is the best way for you to provide for the future then speak to your independent financial adviser. A financial advisor can explain your options and help you choose the best pension options for you and your business.