Should I be contributing to my pension via my Limited Company?

If you’re a director of a limited company, you can contribute pre-taxed company income to your pension pot.
An employer contribution counts as an allowable business expense, meaning your company will also receive tax relief against corporation tax which has now risen to as much as 25%!

How much can my company contribute to my pension as a company director?

 Unlike personal contributions, there’s no limit on what the company can pay into your pension and obtain tax relief, providing it meets HMRC’s ‘wholly and exclusively’ test (HMRC deems the employer pension contribution to be wholly and exclusively for the employer’s trade or profession).

Employer contributions count towards your annual allowance, which is currently £60,000 (this rose on 6 April 2023), while tax relief is only available on up to 100% of your earnings.

If you have a larger amount you’d like to contribute, you may be able to benefit from the ‘carry forward’ rule. This lets you use annual allowances that haven’t been used over the previous three tax years as long as you’ve been a part of a registered pension scheme during this time.

Meaning, if you haven’t used your total allowance over the last three tax years, you can use the leftover amount to increase your contributions.

How much tax could I save by contributing to my pension via my limited company?

 A company director can personally contribute £60,000 or 100% UK earnings. Tax relief will only be given in the tax year the contribution is paid and will be restricted to the higher of £3,600 or 100% of relevant UK earnings.

Relevant UK earnings means any one or more of the following types of income:

  • Employment Income (Wages, Bonus, Overtime, Commission)
  • Benefits in kind which are taxable
  • Statutory Sick Pay and Statutory Maternity Pay
  • Income from a UK/EEA Furnished Holiday Lettings (FHL) business

Further information can be found here: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings

Depending on your earnings, you’ll receive tax relief at your highest marginal rate, either 20%, 40% or 45%.

For the 2023/24 tax year, the corporation tax rate is 25%.

If you’re a basic rate taxpayer, contributing £100 will only cost you £80 because the government will add £20.

As a higher rate taxpayer, a £100 contribution will only cost you £60 because the government will add £40, made up of £20 added immediately and £20 you’ll have to reclaim later via your tax return.

Another benefit is that employers don’t have to pay National Insurance on pension contributions.

The current National Insurance rate for Employers paying Class 1 NIC in 2023/24 is 13.8%, so by contributing directly into your pension through the Company rather than paying it as salary, you save up to 13.8%.

This may be more tax-efficient than personally making pension contributions, especially if you’re limited by how much you can pay into a company director pension personally because of the 100% of earnings rule.

Because of pension schemes’ complex nature, only you can decide which pension scheme is best for you and your situation, however, we recommend seeking  specialist advice from an independent financial adviser.