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Paying Into a Pension for Limited Company Directors

Significant tax benefits may result from pension contributions made through a limited company. These contributions are usually considered an allowable business expense and could be used to offset company liabilities while increasing payouts.

Making Pension Contributions as Limited Company Directors

Among the few tax incentives accessible to limited company directors are the deduction for pension contributions. In addition to preparing for your retirement, contributing to your pension is a tax-effective strategy to use business gains.

However, since pension contributions lower the company’s taxable income and, as a result, its corporate tax burden, it is better to make pension contributions as a limited company as it is more tax-efficient than providing your contributions as an individual. Follow the steps below to contribute to pension pots for limited company directors.

  • Employers can make pension payments from pre-taxed corporate revenue. Since employer pension contributions are “allowable expenses,” your limited company will get tax relief, allowing you to save up to 25% in corporate tax.
  • If employer pension payments meet the “completely and exclusively” standard, pension payments for limited company directors are an allowable business expense. This standard test involves HMRC ascertaining that the employer pension pot contribution is exclusively and wholly for the company’s profession or trade.
  • HMRC will examine the level of overall compensation, including salary, profits, benefits, bonuses, and pension contributions, to see if it is commercially “reasonable” for the activity performed.
  • The contribution is unlikely to fail this test if the individual is a single company director and the primary source of the company’s revenue, but always double-check with an accountant who specialises in small enterprises.
  • Before approving pension payments made through your limited business, HMRC will also consider the following:
  1. Ensure that the pension payments do not exceed the yearly earnings of the firm. Therefore, the firm’s maximum pension contribution for a given tax year will probably be £20,000 if it generates a profit of at least £20,000 that year.
  2. Make sure you are contributing to employee pensions in a manner comparable to other employees in your organisation performing work of a similar calibre.

Due to the complexity of pension plans, consulting a specialist in the financial services sector is highly recommended.

How Much Can My Limited Company Contribute to My Pension Pot as a Limited Company Director?

As long as the limited company satisfies His Majesty’s Revenue and Customs (HMRC) “exclusively and wholly” condition, there is no restriction on the number of contributions the limited company can pay to the pension pot of limited company directors. This also means that there are no limits to the amount of tax relief the company can receive, unlike individual contributions. Employer donations do not only count against your existing £40,000 annual allocation, but they are also not restricted to your applicable UK earnings.

The “carry forward” rule could be advantageous if you want to give a sizable sum. Provided you have been a member of a registered pension system during the relevant period, you may utilise any unused yearly allowances from the preceding three years.

For instance, if your income is over £40,000 and you contribute £30,000 to your pension during the tax years 2018–19, 2019–20, and 2020–21, you will have “saved” £10,000 each year. Consequently, this will result in a total of £30,000, indicating that you might combine it with your allowance for 2021–2022, contributing a total of £70,000 during that tax year.

Take into account your lifetime allowance, which is the maximum sum from the workplace or personal pensions you are permitted to withdraw in your lifetime without incurring additional tax. The current amount is £1,073,100.

More Benefits of Paying Pension as a Limited Company Director

When making pension contributions, many overlook how effectively they avoid inheritance tax (IHT). If you are lucky enough to bequeath assets to your loved ones after passing away, there is tax (IHT) to pay, at a staggering 40% on the bequeathed estate. Pensions are an excellent planning tool since the money in a personal pension is not included in your estate when you pass away.

Another incredible benefit of paying a pension as limited company directors is that employers are exempt from paying National Insurance contributions. Considering that national insurance equates to 13.8%, this represents a sizable saving.

For more information on corporate pensions and their tax-efficient structures and techniques, do not hesitate to contact Claire Markham, the Managing Director of FH Manning Financial Services, at clm@fhmanning.co.uk. She will be happy to advise you on the most effective course of action for your financial situation.

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