If you own a limited company then you have two choices when it comes to pension saving, either make company pension contributions or pay contributions from your personal income.
The tax savings made by company pension contributions are significant.
You don’t even need to be a company owner though to benefit from extra tax savings. If you work for a flexible employer, they might be willing to help you make your pension saving much more efficient.
Company pension contributions vs personal contributions
When we talk about company pension contributions what we mean is that a limited company owner could decide to pay into their own pension direct from the business bank account.
This is like a business expense and so has the advantage of avoiding Corporation Tax. It’s a great way of getting money out of your business into your name without you having to pay tax.
If you were to pay yourself the same amount of money rather than put it in a pension then you will have to pay Income Tax and National Insurance (employer and employee) if paid out of salary. Or Corporation Tax and Dividend Tax if paid out of profits.
Let’s look at an example.
Assuming you are a company owner with profits over £250,000 and a basic rate taxpayer, if you wanted to make a £10,000 pension contribution from your personal bank account it will cost you around £4,611.87 in tax initially.
£14,611.87 x 25% Corporation Tax = £3,652.97
£14,611.87 – £3,652.97 = £10,958.90 to pay out as a dividend
£10,958.90 x 8.75% Dividend Tax = £958.90
£10,958.90 – £958.90 = £10,000 you can now make as a pension contribution.
This method has cost £4,611.87 in taxes but the pension contribution would gross up inside the pension to £12,500 so tax relief of £2,500.
The cost to the company is £14,611.87.
Alternatively, if you made the £12,500 pension contribution straight from the company as company pension contributions it won’t cost the company any more than the £12,500. An effective net saving of £2,111.87 (£14,611.87 – £12,500).
The other advantage of company pension contributions
Another great reason to make company pension contributions is the fact you don’t then need to worry about personal earnings to hit the full pension contribution Annual Allowance.
The current pension Annual Allowance at the time of writing is £60,000 (2023/24 tax year). This means you can pay up to £60,000 gross into a pension.
If you make your pension contributions through your personal account, then you need to have gross earnings of at least £60,000 in order to get the full tax relief.
Earnings really only means salary. Dividends or other investment income like rental income doesn’t count.
This can be difficult for non-company owners as they don’t have full control over their salary. Their paid what is agreed with their employer.
Whereas for a company owner making company pension contributions you can pay in as much as you like from the business providing they meet the ‘wholly and exclusively’ test set by HM Revenue and Customs.
Non-company owners can still take advantage of extra tax savings though if they have a friendly employer.
If you are due a large bonus than normal or just feel you don’t need all the income you are paid you could ask your employer to salary sacrifice some of your income straight into a pension.
This is then effectively a company pension contribution. It avoids you having to pay Income Tax on the money first and also saves you paying National Insurance on the amount sacrificed.
If you employer is feeling really generous, they may even include the saving the employer makes by not having to pay company National Insurance.
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Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.