If you own a limited company, there are many tax advantages that come from paying into your pension. In this article, we'll look at the different ways you can pay into a director pension, as well as the limits that affect your tax relief.
Paying into a pension through your limited company lets you contribute more than others and still receive the tax benefits. As a limited company director, you can contribute in 3 ways:
If you own a limited company and take both salary and dividends, you'll need to be careful when paying into a pension.
The amount you can pay into your pot while still benefitting from tax relief is capped at 100% of your yearly earnings. You may also be able to carry forward unused pension allowances from previous years.
Normally, any contributions you make above your income for the year aren't liable to the regular tax bonus. We explain all the details in our article on pension contributions for the self employed.
Dividends don’t count as ‘relevant UK earnings’, meaning you won't be able to get any tax relief by adding dividends to your pension. Your pension tax relief limit is only calculated using the money you take as income.
The important thing to know is this: if you take a small salary and a large dividend from your company, your pension tax relief limit will be lower. If you exceed this limit, you’ll face tax charges on anything you add above your allowance.
Company dividends aren't eligible for pension tax relief.
For most people, the maximum pension contribution is limited to their total annual salary. However, as a company director, if you pay into your pension through your limited company you can contribute up to £60,000 each year and still claim a reduction on your corporation tax bill. Let's look at that in a little more detail.
If you’re looking to increase the amount of money you can pay into your pension while still receiving the tax benefits, you have a couple of options. You can:
Paying into your pension directly from your company account is known as a business contribution.
There are other benefits to contributing this way. The amount your limited company pays into your pension is pre-tax. Pension contributions are considered an allowable business expense and so your business could save between 19-25% (as of 2023/24) on the amount paid into your pension. This is because you can offset the pension contributions against your corporation tax bill, reducing the overall amount you pay in tax.
Any amount paid into a pension by a business also won’t be liable for National Insurance. By paying directly into your pension rather than paying out as salary, you’ll also save by avoiding National Insurance contributions.
It’s important to note that any amount paid into your pension on this basis must abide by the rules laid out by HMRC. Therefore, the contributions must be "wholly and exclusively" for business purposes.
Making a payment into your pension through your business may be more efficient than making a personal contribution but will depend on your circumstances. It’s worth seeking advice from a financial advisor if you’re not sure about the best option for you.