Pension contributions for directors of limited companies - what are the tax benefits?

This short blog will help you to understand:

• “Are company pension contributions tax efficient?”

• “What are the rules for company pension contributions?”

• “Should I pay myself a company pension contribution?”

Company tax savings

Making employer pension contributions can reduce your company’s tax bill. Pension contributions from pre-taxed company income are an allowable business expense and so don’t attract Corporation Tax. This means a £123.45 pension contribution only costs your business £100 because of the 19% reduction in Corporation Tax.

Pension contributions are also exempt from National Insurance. In total, your business could save up to:

·        32.8% (19% Corporation Tax plus 13.8% National Insurance) by paying into your pension instead of paying you the same amount as salary.

·        19% (Corporation Tax) compared to paying you the same amount as dividends.

Personal tax savings

Additionally, employer pension contributions are paid into your pension gross of personal tax.  Instead, 25% can be taken tax free (either as a lump sum or phased over time) from age 55 (increasing to 57 from 2028) and the remaining 75% will be subject to income tax at your marginal rate as you withdraw the money (which for many people is lower in retirement).

Under HMRC rules, employer pension contributions must be made ‘wholly and exclusively for the purposes of the business’ to receive relief from Corporation Tax.

For example:

Consider a company director (owner-manager) who pays him/herself a basic salary of £12,500 and a further £37,500 in dividends (total earnings £50,000).

For every additional £100 of (post tax) profit drawn from the company as dividends they would receive £67.50 (after dividend tax).

If instead they made an employer pension contribution, they would save corporation tax of 19% and receive the contribution gross of personal income/dividend tax, resulting in an amount of £123.45 into their pension pot (subject to limits/allowances which will depend on individual circumstances).

Get in touch

If you’re a company director and looking for pension advice near Bath or just want further information, please get in touch. Email daniel@wiltshirewealth.com or call 01225 699790.

Please note:

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). Your capital is at risk. The value of your investment (and any income from them) can go down as well as up. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. Tax rates quoted are based on the 2020/2021 tax year.