Contributing to your pension from your Limited Company

Contributing to your pension from your Limited Company

By Published On: 7 December 2021Categories: Limited Company, News, Small Business Owner

Whilst you’re busy running your business, you’ll want to know that your future is also taken care of, usually in the form of a pension. So if you have a Limited Company can it contribute, and how does it work?

In this blog we take a look at just that, to help you plan for your future.

Your Limited Company and your pension

Contributing to your pension from your Limited Company means you’re able to enjoy significant tax advantages, as pensions are considered allowable expenses, and are therefore able to be offset against your Corporation Tax bill.

If you have a Limited Company, you’re able to make pension payments in two ways:

  1. By making personal contributions
  2. By making contributions through your Limited Company

Both options come with their own tax advantages, and the one you choose will depend on your personal circumstances.

Making personal pension contributions – the associated tax implications

For every payment you make into your pension, you receive tax relief which reflects the rate of income tax you pay. So, for example, if you’re a basic rate taxpayer, you’ll pay £100 to save £125 into your personal pension.

Whilst you’re able to pay as much as you like into your pension, there is a limit to the amount you’re able to contribute and still be eligible to receive tax relief. Currently the limit is set to 100% of your income, up to the maximum of £40,000.

If your annual income is £3,600 or less (or nothing at all), then the total amount you’re able to contribute to your pension (within the tax relief limit) is £3,600, including government tax relief.

The associated tax implications from making personal pension contributions as the director of your Limited Company

If you take a mixture of salary and dividends, you’re probably enjoying the benefits of minimising your tax liabilities, and maximising your take home pay. But as dividends aren’t classed as ‘relevant UK earnings’, the total amount you take as salary is what’s used to calculate your pension tax relief, and if you were to exceed this amount you’ll end up facing tax implications from HMRC.

There are two options when it comes to increasing the amount you’re able to pay into your pension. You can either increase your salary payments, or make the contribution directly from your company, which is classed as an employer contribution.

Employer pension contributions

Your Limited Company is also able to make pre-taxed company contributions into your pension. Employer contributions count as allowable expenses, so if your Limited Company were to receive tax relief against Corporation Tax, effectively your company could save 25% in Corporation Tax.

For your pension contributions to be accepted, they must abide by the allowable deductions. Pension contributions must also be ‘wholly and exclusively’ for the purpose of business, and HMRC police this by looking for certain evidence, (eg whether other employees of your Limited Company are also receiving comparable remuneration packages).

Another great benefit available to you by making employer pension contributions directly from your Limited Company, is that employers are not subject to National Insurance on pension payments. So if you decided to contribute directly into your pension rather than paying through the form of a salary, you will save the current National Insurance rate for 2021/22, which is 13.8%.

So at a glance by paying directly into your pension (rather than paying via a salary) your Limited Company can save a total of 38.8%. Your personal circumstances will also play a major role on how beneficial each option is to you, and it may be that paying personal pension contributions may actually mean you’ll end up with more money in your pension pot come retirement time.

How your Vantage accountant can help

Pensions can be tough to understand, and when you’re busy running your Limited Company you’ll want to relax, safe in the knowledge that your money is working as hard as possible for you in the background, ready for when you retire. Your Vantage accountant will be able to offer expert guidance on this, and provide free financial advice that’s tailored to your specific needs, as part of your monthly fee. Just another amazing benefit of being a Vantage client! Get in contact with your Vantage accountant to discuss your pension plans, and how they can support you in achieving your retirement goals.

Note: All the information and advice in this blog post was correct at the time of writing.

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