Making pension contributions from your limited company

If you run a limited company, then you will likely want to consider making pension contributions. Not only will having a pension benefit you personally, but it can help with finding legitimate business expenses to offset your corporation tax bill. Pension contributions as a business expense will be allowed, up to a certain point.

Were you to run your own business, and it was incorporated in the form of a limited company, you can easily make pension contributions to a personal pension. Or, you could make those pension contributions from your limited company. There are numerous advantages to taking part in pension contributions, but what is right for you will depend on your own personal circumstance.

Unsure of where you should begin? Then take a look below.

Why you should set up pension contributions

For one, HMRC notes that your private pension contributions are tax-free up to a certain limit. This typically includes private pension schemes like a workplace pension, a personal or stakeholder based pension or any overseas pension that might qualify for UK tax relief. This would be known as a qualified overseas pension scheme, and any provider would need to let you know if this met such criteria.

If you are interested as to when you would pay tax on a pension contribution, then you will have to pay tax if your pension provider is not registered for tax relief with HMRC. You can read more about the up-to-date regulation on UK pension tax relief rules through the HMRC website. You will also find that you will need to pay tax if your pension pot exceeds 100% of your annual earnings – this is your tax relief limit for the year.

However, you would also find that if your pension contributions exceeded £40,000 in a single year, then you would likely need to pay tax then, too. Finally, you would pay tax if your savings in your pension pot was to exceed £1.03m in your lifetime. This is known as your lifetime allowance.

Personal pension contributions

If you pay money into your pension, you will receive tax relief that reflects your income tax ratio. So, naturally, if your income tax ratio was higher than the average, then you would pay more than the basic rate. If you were to earn less than £3,600 in a single year, or you did not earn anything, then the maximum that you can contribute in a single year within the tax relief limit would be £3,600.

Pensions in a limited company

The complexity begins if you are the director of a limited company, and you take both salary payments and dividend payments. Dividends do not count as what is known as ‘relevant UK earnings’, so only the amount of money that you take as an actual income would be used to work out your pension tax relief limit.

So, if you were to pay yourself in large dividends but with a small salary, then you would have a lower tax relief limit on that pension contribution. If you exceed your limit, then you would need to pay tax. Therefore, if you want to avail of a higher tax relief for your pension contributions, you can either increase your salary or make the pension contribution from your limited company as an employer contribution. There are some great benefits from doing it this way.

If you choose to go down this route, your employer contributions would count as an allowable business expense. This means you could save as much as 19% on your corporation tax bill, as employer tax contributions would qualify for tax relief.

It must, though, be ‘wholly and exclusively’ for business purposes. HMRC considers whether other employees are receiving similar remuneration packages, so be mindful of this. Add in the fact that you would also not have to pay National Insurance Contributions on pension contributions, you could make even more savings. The National Insurance rate for 2018/19 is 13.8%. This means your company could save up to 32.8% by paying money directly into your pension as opposed to paying in the form of a salary.

Of course, there is no right or wrong answer until you evaluate the way that you manage your business. Everyone’s situation will be different.

Should I start a pension if I am self-employed?

If you are running your business as a Sole Trader, then you will need to take your pension status into consideration. While you will have access to a state pension, will that be enough for you later in life, even with savings made?

You should absolutely look to invest in a personal pension plan for yourself. There are many private pension providers that exist, and you should look to get regulated financial advice on what would be the best choice for you personally. Make sure that all financial advice you receive comes from a regulated advisor: if the information provided is unsuitable to you in the long-term, you’ll have financial protection to insulate you from poor advice.

Getting help setting up your pension fund

Of course, making the right decision on a pension contribution can be tough. Whether you run a Limited Company or you are a Sole Trader, you need to understand the importance of setting up a proper pension fund – and the personal benefits that doing so could entail.

To do that, we recommend that you contact our team at Devonshire Green. We can help you to better evaluate your pension options, and help you to make a more informed choice about what kind of pension plan would be most beneficial to you from a savings and tax perspective. While pensions as a business expense are well worth exploring, it’s important that you do it right. Contact us today if you need more information on building the right pension plan for you and your business.

Nick Bagga