Limited Company Pension Contributions

There are two ways in which you can contribute to a pension fund, either personally or via your company and each method could be advantageous from a tax perspective depending on your circumstances.

Personal pension contributions

These are contributions made to a pension scheme from personal funds and as such, attract personal tax relief. Pension providers can reclaim the basic rate of tax on the contributions that you make and this will be added to your fund, i.e. an £80 contribution will add £100 to your pension fund. Your basic rate band will also be extended by the gross pension contribution (£100 in this example) so if you are a higher or additional rate taxpayer tax relief is given in full i.e. up to the top rate of tax you pay.

The maximum that you can contribute to a pension personally (in order to get tax relief) is the higher of £2,880 or 100% of your earned income (typically salary from employment) if this is below the prevailing annual allowance (£40,000 for 2020/21).

As an example, if you have a gross annual salary of £10,000 the maximum personal pension contribution that could be made is £8,000 because when this is grossed up by the pension provider, the total amount added to the pension pot will be £10,000 (the £8,000 contribution divided by 0.8).

Company pension contributions

These are contributions made from company funds and will be deductible for Corporation Tax purposes if they are ‘wholly and exclusively’ for the purpose of trade. Whilst the guidance on what this means in practice isn’t definitive, in general, if a remuneration package is reasonable (and doesn’t result in an overall tax loss for the company), then the contributions can be deducted.

As an example, if you contribute £100 into an employer pension scheme, this would reduce your pre-tax profits by £100 therefore attracting corporation tax relief, currently 19% (2020/21). This would mean that your £100 contribution would effectively cost your company £81 whilst £100 will be invested in your pension fund.

Again, the maximum that can be contributed to a pension is capped at the annual allowance which is £40,000 gross. Note, this limit includes both the gross personal contributions & company contributions.

It is possible to carry forward unused Annual Allowances from the previous three years (so in 2020/21 you could contribute up to £160,000) – in order to do this you must have been in a UK registered pension for the years from which you wish to carry forward allowances and you must earn at least as much in the tax year as you wish to contribute.

It is also important to consider the lifetime pension contribution limit of £1,073,100 (2020/21) & that since 06/04/2016 your annual allowance may be tapered if your adjusted net income exceeds £150,000.

We would always advise speaking to a financial advisor before starting/changing your contributions and to ensure that you receive a package suited to your needs. We have links with a leading wealth management team who can assist you with this if you so wish, please contact your accountant for further details.

What is the best pension for me?

If you are unsure whether you should be contributing to a personal or company pension, considering some of the following options could help you to make your decision:

• Tax relief on personal contributions is limited to 100% of an individual’s salary or other earned income, meaning that any gross contributions, which exceed this amount will not normally be tax efficient
• If your employment status means that IR35 applies to you, then pension contributions made on behalf of a company will always be more tax efficient as they are considered a qualifying expense under the applicable salary rules. This means that both employee’s and employer’s National Insurance contributions are saved which would not be the case if personal contributions are made
• Company contributions are safe from IR35. This means that if you were operating outside IR35, but were subject to an HMRC investigation which resulted in a decision that you should, in fact, have been operating inside IR35, then any pension contributions would be deducted from the salary due
• Both annual and lifetime limits are imposed on the pension contributions that can be made. The annual limit is £40,000 in 2019/20 and the lifetime limit is £1,055,000 so if you want to contribute more than that then the excess will be liable for tax

Helping you plan for your future

Our team of expert accountants can help you through your pension process and make the best decision for you. We’ll do this by ensuring that you make the most of the tax efficiencies available.

To find out more or to take advantage of our service, call us today on 01253 362 062. Our guide to expenses also contains everything you need to plan ahead for your retirement.