Planning for retirement is a smart move for any working adult in the UK. But did you know that as a limited company owner, you can benefit from tax relief when contributing to a pension scheme? We explain how…
So, how is it tax efficient?
Pension contributions can be treated as an allowable business expense, which can, in turn, reduce your company’s corporation tax bill. Although their is tax relief on personal pension contributions, paying direct from the company saves paying corporation tax on the company profit, withdrawing the funds as dividends, paying tax on those dividends and then paying into the pension personally. And, there are no benefit-in-kind considerations to take into account.
Simply put, making pension contributions through your limited company will almost always be more tax efficient than contributing out of your own funds. This can be done by treating the contributions as ‘Employer contributions’.
How does it all work?
Taking any excess income from your limited company and paying it into a pension is often very beneficial from a tax perspective. Pension contributions paid through the company are not subject to corporation tax or national insurance. Therefore the business will save 19% corporation tax (rate as of June 2021) on any employer pension contributions it makes. For example paying £500 a month into a pension scheme would save your company £1,140 corporation tax as well as benefitting from the government pension top up of 20% and building towards your retirement plan.
You are permitted to pay as much as you like into your pension, and the contributions will be tax-free as long as they do not exceed the annual allowance (currently £40,000 per year).
As a side note, if the business is sitting on surplus funds there is a way to pay a large lump sum over £40,000 into your pension pot by using the ‘carry forward’ rule, but this is only possible if you meet the following requirements:
- you have been part of a registered pension scheme for at least three years;
- you have not used the annual allowance in the previous three years;
- you first must use your annual allowance from the current tax year.
So to summarise, pension contributions paid via a limited company is a great tax-saving exercise as well as building towards your retirement plan.
This is one of many tax saving exercises you could consider as a company director. If you want any further information or to discuss your retirement plan with a member of our team please don’t hesitate to get in touch with us today 01924 973020 or fill in the contact page on the website