One of the biggest advantages of being a limited company vs. a sole trader is the fact you can make pension contributions through the company. This is a highly tax-efficient way to take money out of your company, albeit you won’t be able to access the funds until you are 55 years old. Let’s look at the benefits of setting up a limited company director pension and making regular limited company pension payments.
Benefit 1: Tax efficiency for your limited company
When you pay into a limited company director pension, these costs are tax-deductible from your business profits. This reduces the corporation tax liability for your business.
Benefit 2: National Insurance Savings
Employers aren’t required to pay National Insurance Contributions (NICs) on pension contributions made through the company. This means money paid into a limited company director pension rather than paid out as salary reduces the overall NI burden for your company.
Benefit 3: Contribution Limits
You can contribute as much as you like to your limited company director pension, subject to HMRC’s contribution limits and rules to your limited company pension. The annual limit is £60,000 (correct for tax year 2023/24) or 100% of your earnings (whichever is lower). In addition, if you have unused annual pension allowance from the previous three years, you can carry forward the allowance, making it a tax-efficient way to build your retirement fund. The 2023 Autumn budget abolished the lifetime allowance on pension contributions which means there is no longer a maximum ceiling on how much you can save into your pension that qualifies for tax relief.
Benefit 4: Personal Tax Relief
You’ll receive income tax relief on your personal pension payments, providing an additional financial incentive to make pension contributions.
Let’s look at the figures:
A basic-rate taxpayer pays 20% in income tax, so in turn they get 20% back in tax relief on their pension payments. This means if you pay £80 into your pension plan, the government will top this up by £20, so the total contribution to your plan is £100.
For high-rate (40%) taxpayers, the same £100 total contribution will be £60 by the individual and £40 by the government. If you’re an additional rate taxpayer, the figures are £55 by the taxpayer and £45 by the government.
Benefit 5: Future Financial Security
By making regular pension contributions, you’re securing your financial future. Relying on your state pension in retirement means you would have just £203.85 to live on per week. With the rising cost of living, this amount doesn’t go very far to cover your food and bills. Paying into a private pension gives you comfort that you’ll be able to afford to live once you’re retired. The earlier you start regular saving the better due to the compounding effect of interest and the fact that over the long-term, investments in the stock market grow.
Frequently asked questions about limited company pensions
Can a company pay a director’s pension?
Yes, as mentioned above, your limited company can pay into the director’s pension which saves the company corporation tax and possibly NI contributions.
How much can my limited company pay into my pension?
Your limited company can contribute a maximum of £60,000 (or 100% of your earnings whichever is lower) per year into your pension as long as there are no other contributions.
Which pensions are best for a limited company director?
The answer to this question depends on your circumstances so there isn’t a one-size-fits-all answer. We recommend you speak to your financial adviser for help on appropriate pension providers to suit your situation.
Are company pension contributions taxable?
There is no tax or National Insurance to pay on employer pension contributions making it a very tax-efficient way to extract money from your limited company.
Do directors have to be auto-enrolled into a pension?
No, limited company directors don’t need to be auto-enrolled into a workplace pension. You can choose to set up a personal pension or a SIPP (self-invested personal pension) instead or you can opt not to make any pension contributions. However, good accountants will advise you to take advantage of the tax relief on limited company director pension contributions to reduce the overall tax liability.
Find out how you can benefit from setting up a limited company director pension
At Green & Peter, creative chartered accountants in London, we are experts in helping limited company directors minimise their tax liability. If you aren’t sure whether you can take advantage of the tax benefits of a limited company director pension, get in touch with our team today at 0208 446 8100 or email info@greenandpeter.co.uk to book a no-obligation meeting free of charge.
