How Much Can a Company Contribute to a Director’s Pension?

As a limited company director, you have the advantage of paying more into your pension through your company while claiming all the tax benefits. However, there are limits. This guide explains how company pension contributions work.

Making Company Pension Contributions

Once you’ve set up your limited company pension, you can start calculating how much your contributions will save in tax. For most people, self-employed pension contributions are capped at either their yearly salary or £60,000, whichever is lower.

As a limited company director, your business can contribute to your pension without the salary restriction that other sole traders or self-employed workers face. Contributions to your pension are tax-free up to £60,000 a year (for the 2023/2024 tax year onwards), even if your profits total less than £60,000. Contributions above this limit will be subject to a tax charge.

If you have a significant amount to contribute, you may be able to use the carry forward rules. This allows you to use any unused annual allowance from the previous three years, provided you were a member of a registered pension scheme during that time. You must first use your full annual allowance for the current tax year before using any unused allowances from the previous three years.

Remember to consider any other factors, such as whether you’ve taken any pension benefits from another policy.

For more details, check out our comprehensive guide on pension contributions for the self employed.

Personal vs. Company Pension Contributions

As a limited company director, you can choose to pay into your pension from your salary or directly from your company. But which option is more advantageous? Here’s a breakdown of the rules and benefits of each to help you decide.

Personal Contributions

Personal pension contributions can come from either:

• Your PAYE salary
• Dividends

Personal contributions are subject to the annual pension allowance. The maximum you can contribute to your pension is £60,000 or 100% of your earnings (excluding dividends). Your allowance resets at the start of every tax year.

Personal contributions benefit from tax relief on every contribution. You’ll receive a 25% bonus on everything you contribute to your pension, up to your annual allowance.

Higher and additional rate taxpayers can gain even more by adding their contributions to a self-assessment tax return. With tax relief on contributions, the maximum anyone can effectively pay is £48,000, with £12,000 coming from tax relief.

Company Contributions

Contributions made directly from your limited company work differently. Unlike personal contributions, the amount you can contribute to your pension from your company isn’t directly tied to your income. The only limit is your £60,000 annual allowance.

However, any contributions must be “wholly and exclusively” for your pension and not for any other purpose. Your available annual allowance may be considered when deciding if the amount you are contributing is appropriate.

Company pension contributions are classified as a business expense and can be offset against your profit, reducing your corporation tax liability. However, you will not receive tax relief on these contributions when they reach your pension.

It’s also worth noting that contributions from your business to your pension won’t be subject to income tax or National Insurance. They will also avoid dividend tax.

Which Is Better?

Both methods of contributing to your pension offer significant tax benefits and help you keep more of what you earn. The best method for you will depend on your personal finances and business profits. You can also mix both methods of contributing throughout the tax year, as long as you stay within your annual allowance.

For help maximizing the tax efficiency of your contributions, we recommend speaking to a financial advisor.

Director Pensions at Penfold

With a Penfold pension, contributing through your limited company takes just 5 minutes. You can set up regular payments or make one-off payments via bank transfer, Direct Debit, or instant payments, all through our app with just one tap.

We help thousands of directors daily to gain full control over their finances. Penfold provides all the tools and support you need to track down old pots, make tax-efficient decisions, and grow your hard-earned money.

Set up your personal pension with Penfold today in just 5 minutes.