If you're a director of a limited company, you can contribute pre-taxed company income to your pension pot. What's more, because an employer contribution counts as an allowable business expense, your company will also receive tax relief against corporation tax.
Can I contribute to my pension via my limited company?
The short answer is yes – in fact, pension contributions are among the few remaining tax breaks available to limited companies. Putting money into your pension isn't only about saving for your retirement but is also a tax-efficient way of using profits from your business.
As a company director of your own limited company, you can contribute to your director's pension both as employer contributions and as an individual. And it's possible to claim pension tax relief on both.
However, contributing through our limited company is usually more tax-efficient than contributing your funds as an individual, as you'll reduce your company's taxable profits and your corporation tax liability.
How much can my company contribute to my pension as a company director?
Unlike personal contributions, there’s no limit on what the company can pay into your pension and obtain tax relief, providing it meets HMRC’s ‘wholly and exclusively’ test.
Employer contributions count towards your annual allowance, which is currently £60,000 (this rose on 6 April 2023), while tax relief is only available on up to 100% of your earnings.
If you have a large amount you'd like to contribute, you may be able to benefit from the 'carry forward' rule.
This lets you use annual allowances that haven't been used over the previous three years as long as you've been a part of a registered pension scheme during this time.
So, if you don’t use your total allowance over the last three tax years, you can use the leftover amount to boost your contributions.
How much tax could I save by contributing to my pension via my limited company?
A company director can personally contribute £60,000 or 100% of PAYE income and still get tax relief. Depending on your earnings, you'll receive tax relief at your highest marginal rate, either 20%, 40% or 45%.
For the 2023/23 tax year, the corporation tax rate is 25%. If you're a basic rate taxpayer, contributing £100 will only cost you £80 because the government will add £20.
As a higher rate taxpayer, a £100 contribution will only cost £60 because the government will add £40, made up of £20 added immediately and £20 you'll have to reclaim later via your tax return.
Another benefit is that employers don't have to pay National Insurance on pension contributions.
The current National Insurance rate for 2023/24 is 13.8%, so by contributing directly into your pension rather than paying it as salary, you save up to 13.8%.
In total, this means that your company could save by paying money directly into your pension rather than paying it in the form of a salary.
This may be more tax-efficient than personally making pension contributions, especially if you're limited by how much you can pay into a company director pension personally because of the 100% of PAYE earnings rule.
How do I contribute to my pension via my limited company?
- You can make pension contributions from pre-taxed company income and, as employer contributions are classified as 'allowable expenses', your business will receive tax relief, saving in corporation tax.
- Company director pension contributions are an allowable business expense providing the employer contributions passes the 'wholly and exclusively' test, meaning that HMRC deems the employer pension contribution to be wholly and exclusively for the employer's trade or profession.
- HMRC will want to establish whether the level of total remuneration – salary, dividends, bonuses, benefits in kind, pension contributions etc – is commercially 'reasonable' for the work being done.
- Where the individual is a sole company director and the main generator of the company's income, the contribution is unlikely to fail this test, but always check with an accountant that specialises in small businesses.
- Other factors HMRC will examine before allowing pension contributions via your limited company include:
- Checking that pension contributions aren't more than the company's annual profits. So, if your company turns a profit of £20,000 in a tax year, £20,000 will likely be the maximum the company can contribute to your pension for that year.
- If you employ staff, ensure you're making similar pension contributions to others in your company who are doing work of similar value.
Because of pension schemes' complex nature, it's well worth getting specialist advice from an independent financial adviser.
What are the other tax-efficient ways to employ cash as a company director?
Dividends can be paid to anyone who owns shares in a company – as long as the company is making sufficient profit to cover these payments.
They're exempt from National Insurance contributions and are discretionary, subject to the company being able to afford to pay them.
A shareholder can receive up to £1,000 in dividends in any tax year before paying tax.
You could consider a Self-Invested Personal Pension (SIPP) which can offer you a greater range of investment choices. SIPPs are also more flexible as you can invest and manage your portfolio regularly.
An alternative is a small-self-administered pension scheme (SSAS). Unlike other defined contribution schemes, an SSAS must be set up via a trust and must have no more than 11 members.
Directors of family businesses often set these up on behalf of themselves and a small number of specified employees to give family members a share in the business's assets and pension.
There are various ways to get tax relief if you're self-employed (a sole trader or partner in a partnership) when spending money to operate your business.
Some costs you may be able to claim for include:
- office costs
- travel costs
- staff costs
- training costs
- advertising
- marketing
- things you buy to sell on such as stock or raw materials.
You can also get tax relief on things such as charity donations or child maintenance payments.
