A pension is likely something at the very bottom of your priority list as a company director. But, pensions are actually hidden gems that are hugely tax advantageous for directors. Tax efficiency is a complicated thing, so we’ve simplified it to just four tax benefits of a pension that will have the biggest impact on your tax, finances and income.
The reference to tax benefits here applies to the tax year of 2022/23 which are subject to change in the future. And, tax treatment does depend on your individual circumstances.
Contributions from your limited company into your pension are classed as a business expense. So, even though it goes into your pocket (your pension), you don't pay income tax or national insurance contributions. Whereas if you took this money as salary or dividends, these tax deductions would apply and reduce the total amount in your pocket.
Because these contributions are an allowable business expense, they are tax deductible from your corporation tax bill. The corporation tax rate is currently 19%, so if you paid £1,000 into your pension, your company will pay £190 less corporation tax in your tax bill. Therefore, you’ll also have £190 more in company profits, which you could potentially take out in dividends, salary or even pay into your pension!
Please know that, in order for your pension employer contributions to receive the tax benefits, they must be classed as an allowable deduction by HMRC whereby the contribution is ‘wholly and exclusively’ for the purpose of business.
Because pension contributions are tax free, and they reduce your tax bill, contributing into a pension means you can take more out of your limited company, and therefore have more in your pocket overall.
This graph shows how much money a director whose limited company earns £75,000 a year, can take out of their company in three different ways:
The graph assumes that the company earns £75,000 a year, the director has paid themselves a minimum salary of £9.5k so as not to incur national insurance or income tax. 19% corporation tax and dividend tax at the appropriate rate has also been applied. All calculations are based on 2022/23 tax rates and thresholds. However, tax treatment depends on your individual circumstances & may be subject to change in the future.
For most people, pension contributions are capped at either their salary, or £40k whichever is lowest. As a company director, if you pay into your pension through your limited company you can contribute up to £40k each year, without the salary restriction, and still claim the 19% reduction on your corporation tax bill!
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