Pension scheme

A brief pension guide to directors of a limited company

If you're a director of a limited company but haven't made pension contributions through your company, you could be missing out.

In the UK, under the Pensions Act 2008, every employer is required to enrol eligible staff into a workplace pension scheme and contribute towards it.

Pensions provide a win-win situation for both employers and employees. As the aim is to encourage individuals to save for their retirement, pensions allow your employees to get tax relief when you (the employer) take workplace pension contributions out of their salaries before deducting Income Tax. For a company, pension contributions reduce your company's taxable profits.

If you're a director of a limited company and if you're taking a low salary, you can make pension contributions straight from your company to your own pension pot too. This is a tax-efficient way to get money from your company while providing you with money which you can retire on. In this article, our small business accountants aim to explain how pension contributions can help your company and also you, the director of a limited company.

If you're a director of a limited company and you take salaries

In this scenario, assuming you're a director and also a salaried employee of a limited company in England, you may get tax relief on your pension contributions worth up to 100% of your annual earnings.

Here's an example: you and your company pay into your pension (maximum £40,000 a year), your pension provider then claims basic rate tax relief of 20% on the contributions you pay up to 100% of your annual earnings. In other words, you pay in £80, tax relief adds £20, so £100 goes into your pension.

If you're a director of a limited company and you take salaries and dividends

Many small business owners take a low salary and top up the income with dividends from profits. If you are in this scenario, the amount of pension tax relief you receive is limited to your salary earnings only as dividends are not considered as 'relevant UK earnings'.

But as a director of a limited company, you can make pension contributions straight from your company's pre-taxed income which helps your retirement and also being tax efficient.

The reasons many directors prefer this tax-efficient approach is because pension contributions in this instance may be considered as an allowable business expense if they are 'wholly and exclusively' for the purposes of business and they could save you corporate tax. In addition, the company also does not have to pay tax and National Insurance on the amounts it contributes to the pension pot as long as the figures are below the annual allowance which could range from anywhere between £10,000 and £40,000 per annum excluding any roll forward allowances. As the circumstances of each person are different from others, it is best to give one of our small business accountants a call on 020 8108 0090 for personalised advice.

The rules surrounding company pension contributions

While pension contributions made via your limited company are tax efficient, there are rules to follow.

Annual allowance

Don't fully understand pensions tapering?You can learn more about it and how it may affect you in our article here. Tapered pensions annual allowance - what is it and does it affect me?.

Beware that the annual allowance is £40,000 a year, unless you have earned sufficient income to trigger the pension tapering which could reduce the annual allowance down to £10,000. Anti-pension recycling rules can also reduce this annual allowance to a lower amount of £4,000 per annum.

In some instances, you may be able to pay over £40,000 a year if you have registered with a pension scheme but haven't used the £40,000 annual allowance in the previous three years.

Lifetime allowance

You need to pay tax if your pension pots are worth more than the lifetime allowance. At present (2021/22), the lifetime allowance amount is £1,073,100. This has also been frozen for 2022/23, which given inflation rates, means a relative reduction in your overall allowance.

What counts towards your lifetime allowance can get complicated quickly as it depends on the type of pension pot you get, whether it is defined contribution or defined benefit. This is where a licensed pension advisor can help. Look for one who is regulated by the Financial Conduct Authority (FCA) and has extensive experience in pension planning.

Amount invested

Technically you can invest as much as you like into a pension, but the amount should not exceed your company's income for the year. Also, if the amounts are 'excessive' for the value of work you undertake, they may prompt HMRC to ask questions.

Get professional advice

While our small business accountants can certainly help you become efficient from a tax perspective, chances are you need a qualified pension advisor to help you choose a pension scheme that best suits you, since there are several available. For the purpose of this article, we will highlight three popular schemes.

Self-invested personal pension

A self-invested personal pension (SIPP) is a flexible and portable personal pension scheme allowing you to invest in a wide range of assets. Some SIPPs can even get a mortgage to part-fund the purchase of a rental property and use the rental income to service the mortgage repayments as well as the costs of running the property.

Small self-administered pension scheme

A small self-administered pension scheme (SSAS) is often taken by company directors and senior staff. The main benefit of an SSAS is that it offers increased flexibility on where the scheme's assets can be invested. For instance, it can purchase the building the company occupies and lease it back to the company. An SSAS can also borrow money for investment purposes if the terms allow.

Multi-employer pension scheme

Many companies have now implemented a multi-employer pension scheme, which is essentially an umbrella term referring to workplace pension schemes that are accessed by different employers and their employees. NEST, the workplace pension trust set up by the government, is an example of a multi-employer pension scheme.

Pensions and tax are complex subjects

Pensions and tax are complex subjects. How much tax benefits you can get from company pension contributions depend on your individual circumstances and the latest tax rules. This is why we encourage small business owners to speak to one of our chartered accountants first. In addition, having a chat with a qualified pension advisor can also help you to choose the best pension package.

At Tax Agility, we have dedicated small business accountants based in Putney, Richmond and Central London. Everyone in our team understands that business owners and company directors work relentlessly to achieve their dreams, which is why we are keen to help you keep your hard-earned money by becoming tax efficient.

As we are ICAEW chartered accountants, you know that you can rely on us to give you honest answers and provide services with no hidden charges. In other words, you're in good hands with us working alongside you.

This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.

 

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by Robin Brown