Can your Limited Company contribute to your pension?
When you’re busy building your contracting empire, you’ll want to rest easy knowing that your future is taken care of, usually in the form of a pension. So is your Limited Company able to make contributions?
This blog explores how your company can contribute, to help you plan for your future.
Your pension
Contributing to your pension from your Limited Company also brings significant tax advantages, as pensions are considered by HMRC as an allowable expense, and therefore you’re able to offset it against your Corporation Tax bill.
You’re able to make payments into your pension in two ways:
- By making personal contributions
- By making contributions through your Limited Company
Both options come with their own tax advantages, and depending on your own personal circumstances one will suit you better than the other.
Making personal pension contributions – the tax implications
You receive tax relief from every payment you make into your pension, which will reflect the rate of income tax you pay. So for example, if you’re a basic rate tax payer, then you’ll pay £100 to save £125 into your personal pension.
Whilst there is no limit to the total amount you’re able to pay into your pension, there is a cap on the amount you can contribute and still receive tax relief. Currently you’re able to contribute 100% of your income, up to the maximum of £40,000.
If you’re earning less than £3,600 per year or nothing at all, you’re only able to contribute a maximum of £3,600 within the tax relief limit, which includes government tax relief.
Making personal pension contributions as the director of your Limited Company – the tax implications
Taking a mixture of a small salary and dividends is the best way to minimise your tax liabilities and maximise your take home pay, but it isn’t the greatest way to increase your pension, as dividends aren’t classed as ‘relevant UK earnings’. So the salary you take which is probably low due to the tax implications, is what’s used to calculate your pension tax relief limit, and if you were to exceed the limit you’ll face tax implications from HMRC.
So to be able to increase the amount you’re able to pay into your pension you have two options, you can either increase your salary payments, or make your pension contributions straight from your Limited Company. This is classed as an employer contribution.
Employer pension contributions
Your Limited Company is able to make pre-taxed contributions into your pension, and they count as allowable expenses, so your company receives tax relief against Corporation Tax; effectively your company could save a maximum of 25% in Corporation Tax.
Pension contributions must abide by the allowable deductions, in order for them to be deemed as acceptable. Contributions must be ‘wholly and exclusively’ for the purpose of the business, and HMRC ensure this isn’t being abused by looking for certain evidence, such as whether other employees of your Limited Company (should you have any) are receiving comparable remuneration packages.
Another benefit of making employer pension contributions from your Limited Company, is that employers are not subject to National Insurance on pension contributions. So if you contribute directly into your pension rather than paying in the form of a salary, you’d save up to the current NI rate for 2021/22 which is 13.8%. Your personal circumstances will have an effect on how beneficial this is to you, and you may find that paying personal pension contributions will ultimately mean you have more money in your pension pot. Your contractor accountant will be able to advise you on the best solution based on your circumstances.
How SG Accounting can help
When it comes to financial planning it’s best to leave it to the experts, as any mistakes can have a lasting effect on your savings. You’ll also want to rest assured, knowing your contractor pay is working away as hard as possible in the background. Here at SG our accountants offer our clients advice and support regarding all matters tax related, and have the specialist contacts within the Limited Company contractor market who’ll be able to provide you with tailored advice. Just another fantastic reason to be an SG client! Get in touch with our team today to find out more.
Note: All the information and advice in this blog post was correct at the time of writing.
