If you own a limited company, there are many tax advantages of paying into your pension. For example, you can contribute more than others and still receive tax benefits. You can pay in as a personal contribution, or you can pay money into your pension through your business.
If you own a limited company and you take both salary and dividends, the dividends don’t count as ‘relevant UK earnings’, so only the amount of money you take as income will be used to calculate your pension tax relief limit.
This means that if you take a small salary and a large dividend from your company, your pension tax relief limit will be low. If you exceed your limit, you’ll face tax charges.
The amount you can pay into your pension and receive tax relief on is capped at the amount you earn for the year.
If you own a limited company and receive a small salary and dividends as income then only the salary counts towards your yearly earnings. This restricts the amount you can pay into your pension and get tax relief added.
For non-company directors, the maximum pension contribution is limited to their total annual salary. As a company director, if you pay into your pension through your limited company you can contribute up to £40,000 each year and still claim the 19% reduction on your corporation tax bill.
If you’re looking to increase the amount of money you can pay into your pension but also receive the tax benefits, you could either increase your salary or alternatively make the pension contribution straight from your company. This would be an employer 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 19% (as of 2020/21) on the amount paid into your pension. This is because you can offset the pension contributions against your corporation tax bill, which will reduce overall how much you pay in tax.
Any amount paid into a pension by a business also won’t be liable for National Insurance Contributions. By paying directly into your pension rather than paying out as salary, you’ll save on paying 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 it will depend on your circumstances. It’s worth seeking advice if you’re not sure which would be the best option for you.