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You may be think how to best take advantage of tax reliefs if you are the owner of a limited company. An excellent place to start would be making pension contributions. But should you make personal pension contributions or pension contributions from limited company? There is no clear ans to this question. We advise speaking with a tax advisor to go over your alternatives in every situation. This article will provide you a general summary to help you start considering the benefits and drawbacks of each strategy.
Personal vs Company Pension Contributions: Which is Better?
When it comes to pension contributions limited company owners have two primary options. Making contributions as an individual or through the company. Each approach has its own set of tax implications that can impact your savings and tax relief potential.
Tax Benefits of Personal Pension Contributions
All pension contributions offer tax benefits, but personal pension contributions work slightly differently compared to those made by a limited company. When you make a personal contribution, you receive tax relief in line with your income tax band.
Example
If you are a higher rate taxpayer, you will receive tax relief of 40-45 %(you get 20 automatically. But a further 20% or 25 % can be claimed through your tax return). In essence if you are eligible for tax relief of 40% you’ll only need to contribute £600 for a gross amount of £1000 to be added to your pension.
If you own a limited company making a personal pension contribution would offer no savings in terms of national insurance contributions. Moreover if you decide to make pension contributions through your company. You can claim them from your corporation tax bill & use them as business costs.
A personal pension contribution does more than reduce your income tax bill. If your income sits between £60,000 and £80,000, the same contribution lowers your adjusted net income and can reduce or clear the High Income Child Benefit Charge too, on top of the pension relief covered above.
Pension Contributions From Limited Company
If you own a limited company making pension contributions via your business could be far more tax efficient. Pension contributions made through the company are considered a business expense meaning they can be deducted from your corporation tax bill. This can provide significant savings compared to making personal contributions.
Tax Savings for Limited Company Directors
As a director of a limited company you’re likely to take a small salary and larger dividends, as this is the most tax-efficient method. However dividends are not considered relevant UK earnings and do not qualify for personal tax relief.
There is an alternative method. Directors can take full advantage of the tax benefits associated with contribution to a pension scheme by having the company pay the contribution directly. This is because employer contributions to a pension system are deductible as business expenses. As a result, the company could save up to 19% in corporation tax bill. Employers aren’t required to pay national insurance on pension contributions, which could represent a saving of 13.8% and you won’t be required to pay national insurance as an employee, either, which is a further saving of either 2% or 12 depending on your salary level.
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Limitations to Pension Tax Relief for Limited Companies
Although pension contributions offer attractive tax benefits, there are limits to the relief you can claim. The current annual allowance is up to 100% of your earnings or a maximum of £60,000 per year. If you haven’t used up all of your allowances in prior years, this lets you maximise your pension benefits.
Employer Pension Contributions: Practical Considerations
You may think this is a fantastic concept you might be worried about how it would actually operate. After all would not you need to set up a corporate pension plan? The good news is that this is not necessary. Many personal pension providers have mechanisms in place so that companies can pay directly into their schemes. This can simplify the process and reduce administrative burden.
Annual Allowance and Lifetime Allowance
Be aware of annual allowance for pension contributions which is £60,000 for the tax year 2024-2025. If this threshold is crossed tax penalties could be imposed.
Long term pension planning will be impacted by the Lifetime Allowance (LTA) removal which will take impact in April 2024.
HMRC Guidelines: Ensuring Fair Pension Contributions
Any contribution made by the company on your behalf will need to abide by HMRC rules. Excessive pension contributions will raise a red flag – and so it is important to ensure that your remuneration package is justifiable (from your salary to your pension plus any other benefits in kind). It’s also important that similar remuneration packages are being offered to other employees.
Whether your financial package is seen as justifiable will depend on a number of factors, including:
- What is offered to other employees at the same level – not just in your company, but other comparable companies.
- What salary would be offered to another candidate, were they recruited to take over your position.
- Your experience, skill set, level of responsibility, and the hours you work.
- The financial performance of the company.
These factors help determine whether the pension contributions are appropriate and avoid the risk of penalties.
Factors to Consider When Increasing Contributions
If you do only pay yourself a small salary and have been receiving additional income in the form of dividends, there may be strong reasoning to support further remuneration as a pension contribution. We’d recommend that any increase in contribution – or any large, standalone contributions – is discussed, approved and documented at both directors’ and shareholders’ meetings to maintain transparency and compliance with HMRC guidelines.
Consult IBISS & Co for Expert Pension Advice
Pension contributions can be complex especially for limited company owners looking to maximise tax relief while staying within HMRC guidelines. At IBISS & CO we specialise in helping business owners make the most of their pension contributions while optimising their tax efficiency.
If you are ready to explore your options or need help on setting up a limited company. Do not hesitate to contact with IBISS team of experienced tax advisers. With Multiple Offices in UK and a team of experienced tax advisers & accountants. we are equipped to handle all your needs.
