One of the few remaining tax breaks for limited companies are pension contributions. As a company director – and for any employees – it is worth considering taking advantage of this tax break.
Directors of limited companies can make contributions to a company director’s pension as both a business and an individual. That means you can contribute as both ‘employer’ and ‘employee’, but this is, of course, subject to annual allowances.
By paying pension contributions, your company’s profits are effectively lower so Corporation Tax liability reduces.
Legally, your company needs to contribute to your employee’s pension fund as part of auto enrolment. And while you may want to pay the minimum amount, there are reasons to contribute more.
Remember, that directors are exempt from auto enrolment schemes, but they can choose to join an auto enrolment scheme if they wish.
Making pension contributions
By paying pension contributions you will reduce your company’s taxable profits and that means a lower Corporation Tax liability. Paying contributions through your limited company is, in most cases, more tax-efficient than contributing from your own funds.
Due to the complexities of pensions, we recommend you take advice from a financial planner before making any contributions to employee schemes, including your own.
What tax savings are available on contributions?
The Corporation Rate is currently 19%. That means for every £100 your limited company earns as profit you pay £19 in Corporation tax. As a result, the amount you can take from your company as a dividend is reduced to £81.
If you pay £100 into an employee’s pension fund, however, it effectively only costs £81 to the company due to a reduction of payable Corporation Tax. The investment will hopefully grow within the fun over time. From 1 April 2023, the rate rises to 25%.
How do I contribute via my limited company?
You can make your contributions from pre-taxed company income. As employer contributions are classed as ‘allowable expenses’, your business receives tax relief.
Pension contributions for company directors are an allowable business expense providing the employer contributions pass the ‘wholly and exclusively’ test. This is where HMRC considers payments as wholly and exclusively for the employer’s trade or profession.
Can I save on National Insurance?
As well as the 19% Corporation Tax relief, there are no employer National Insurance contributions to make on any limited pension contributions you make through your limited company. Employer NI contributions are 13.8%, meaning every time you make pension contributions via your limited company.
Coupled with the Corporation Tax saving, this equates to saving of 34.8% and another reason to pay you pension via your limited company rather than personal contributions.
Employee’s pension scheme contributions
The amount you can pay into an employee’s pension scheme is unlimited – but HMRC does have rules and limits. Contributions are tax free up to the current annual allowance of £40,000 (for the 2020/21 and 2021/22 tax years).
Be aware that the value of your contributions must not exceed your company’s income for the year.
As we have already mentioned, the complexities of pensions mean it is best to speak to an independent financial planner before making any decisions.
We can help connect you with financial planners, so contact us today and we’ll help you find the right advice.