Contributing into a pension as a company director will cost you less now, and will get you more money in the long run.
Contributions from a limited company into a pension are classed as a business expense.
Even though your money goes into your pension, you won't pay income tax or National Insurance. However if you took the money as salary or dividends, these tax deductions would apply and reduce the total amount in your pocket.
Contributions are an allowable business expense and therefore deductible from corporation tax.
The corporation tax rate is between 19-25% depending on company profits. At the lowest 19% rate, £1,000 paid into a pension, reduces corporation tax by £190. That's also an additional £190 company profit which can be taken out in dividends, salary or paid into a pension!
For most people contributions are capped at their annual salary or £60k, whichever is lowest.
As a company director, if you pay into your pension through your limited company you can contribute up to £60k each year, without the salary restriction, and still claim the 19% reduction on your corporation tax bill!
This graph shows how much money a director whose limited company makes £50,000 profit a year, can take out of their company in three different ways:
The graph assumes that the company makes £50,000 profit a year, the director has paid themselves a salary of £12,570 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 2023/24 tax rates and thresholds.
Tax treatment depends on your individual circumstances & may be subject to change in the future.
The government incentivises people to pay into private pensions by offering a tax break on contributions.
A ‘personal contribution’ will receive the government’s 25% tax relief at source.
For example, if you add £1,000 into your pension, the government will add an extra £250 into your pension. This is because you’ve already paid £250 tax (at the basic rate of 20%) on the £1000 you contributed into your pension.
As a Penfold pension customer, we claim this tax relief for you. No forms, no fuss.
If you are a higher or additional rate taxpayer, you can enjoy even more tax relief.
Contributions into your pension will automatically receive the 25% tax relief, but because you’re paying higher rate tax above the basic rate threshold, the government will pay back the tax you’ve already paid by offsetting it against your self-assessment tax return.
This means that contributions of £1,000 into your pension will have £250 added on top by HMRC, and you’ll also be able to claim an extra £250 in your self- assessment tax return.
Now we’ve covered the main benefits of different pension contributions, here are some top tips to reduce how much tax you pay as a company director.
If you’re a UK resident taxpayer under the age of 75, you can contribute your net yearly earnings into your pension, and then receive tax relief on top of those contributions.
For sole traders, your yearly earnings count as your company’s total profit, before tax.
For limited company directors, your yearly earnings count as any salary you are paid, plus any taxable benefits, before tax. Dividends don’t generally count as earnings.
Have you always contributed your net annual earnings into your pension each year?
If you've been a member of a registered pension scheme before, then you can carry forward your unused Annual Allowance from the previous three tax years.
For example, if you haven’t made any contributions into your pension for the last 3 tax years, you may be able pay up to £160,000 into your pension. To work out how much you might be able to carry forward, it’s always best to get in touch with your financial adviser.
If you haven’t already maximised your allowance for this year, making contributions into your pension before your company’s financial year end to be included in that year’s tax bill.
This means if you paid into your pension before the end of the financial year, you’ll pay less corporate tax for that year.
For any personal contributions, make these before April 5th to reduce your tax bill in your next self-assessment tax return.
In this article, we'll look at how pensions work for directors.What is a director pension?
In this article, we'll look at the ways to and limits of paying into a director pension.How much can a director pay into a pension?
In this article, we'll look at how company pension contributions work.How much can a company contribute to a director's pension?
Running your own business can be stressful. Our pension is quick to set up and simple to use, helping directors and people running limited companies make tax-efficient contributions in line with cash flow anytime, anywhere.