How to contribute to your pension through your limited company
Posted on 23rd March 2022
Did you know that directors of limited companies can contribute towards their pension from their business income?
As an employer these contributions can qualify as allowable business expenses so your corporation tax bill will be reduced.
How much can I contribute to my personal pension?
You will receive tax relief on your personal annual allowance, which is a maximum of £40,000 or 100% of your PAYE income, whichever is lower. Depending on your earnings, the tax relief you receive will be at your highest marginal rate, either 20%, 40% or 45%.
If you are a basic rate taxpayer, a £100 pension contribution will cost you £80 because the government will add £20. If you’re a higher rate taxpayer your £100 contribution would cost £60 or £55 because the government will add £40 or £45, depending on your income. The first £20 is added immediately and another £20 or £25 can be reclaimed via your tax return.
You might also be able to use the 'carry forward' rule which allows you to offset contributions against any annual allowances you haven’t used from the previous three years. You can do this if you've been part of a registered pension scheme during the period.
For example, if your salary was over £40,000 in the tax years 2018/19, 2019/20 and 2020/21 and you paid £30,000 into your pension, you could claim £10,000 of your unused allowance for each of those years, allowing you to contribute an additional £30,000 of personal contributions to your pension in the 2021/22 tax year. Your personal contribution could then be £70,000 for the year.
How much could pension contributions through my limited company save?
Pension contributions should be ‘wholly and exclusively’ for the purposes of business so HMRC will look for evidence such as whether other employees receive comparable packages. You will need to show that your salary, dividends, bonuses, benefits in kind, and pension contributions are commercially 'reasonable' for the work you do. If you’re the sole director of your company and your pension contributions don’t exceed your company’s profits you are likely to pass this test.
Your director’s pension contribution will reduce the amount of corporation tax you have to pay, which is 19% for the 2021/22 tax year. In addition, employers don't pay National Insurance on pension contributions, which for 2021/22 is 13.8%. This means you could save 32.8% by paying into your pension rather than receiving a salary. This might be a tax-efficient way of increasing your pension contributions, especially if you have already reached the PAYE limits for your personal pension contributions.
What is my pension lifetime allowance?
Your pension lifetime allowance is the maximum you can draw from your workplace or personal pension in your lifetime without paying extra tax. For the 2021/22 tax year this is £1,073,100.
Please get in touch if you would like to know more about paying director’s pension contributions through your limited company.
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