Pension Contributions - Tax Savings
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Can I contribute to my pension via my limited company? →
How much can my company contribute to my pension as a company director? →
How do I contribute to my pension via my limited company? →
What are the other tax-efficient ways to employ cash as a company director? →
Can I invest in property through my SIPP? →
Tax relief - how is it calculated? →
What if I don’t have an income at the moment? →
What happens to my SIPP when I die? →
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Can I contribute to my pension via my limited company?
The short answer is yes – in fact, pension contributions are among the few remaining tax breaks available to limited companies. Putting money into your pension isn't only about saving for your retirement, but is also a tax-efficient way of using profits from your business.
As a company director of your own limited company, you're able to contribute to your director's pension both as a business as employer contributions and as an individual. And it's possible to claim pension tax relief on both.
However, contributing to your limited company is usually more tax-efficient than contributing your funds as an individual because you'll reduce your company's taxable profits and, therefore, your corporation tax liability.
How much can my company contribute to my pension as a company director?
There are limits to the amount you can pay into your pension and still receive tax relief. The limit is currently a maximum of £40,000 or 100% of your income, whichever is lower – known as the pension annual allowance.
If you have a large amount you'd like to contribute, you may be able to benefit from the 'carry forward' rule. This lets you make use of annual allowances that haven't been used over the previous three years, as long as you've been a part of a registered pension scheme during this time.
For example, if your salary is over £40,000 and in the tax years 2019/20, 2020/21 and 2021/22 you paid £30,000 into your pension, then you would have 'saved' £10,000 allowance in each of those years, making a total of £30,000. This means that you could add this to your 2022/23 allowance and contribute a total of £70,000 in that tax year.
Also bear in mind your lifetime allowance, which is the maximum amount you can draw from pensions (workplace or personal) in your lifetime without paying extra tax. This figure is currently £1,073,100.
How do I contribute to my pension via my limited company?
1. You can make pension contributions from pre-taxed company income and, as employer contributions are classified as 'allowable expenses', your business will receive tax relief, saving up to 25% in corporation tax.
2. Company director pension contributions are an allowable business expense providing the employer contributions passes the 'wholly and exclusively' test, meaning that HMRC deems the employer pension contribution to be wholly and exclusively for the employer's trade or profession.
HMRC will want to establish whether the level of total remuneration – salary, dividends, bonuses, benefits in kind, pension contributions etc. – is commercially 'reasonable' for the work being done.
Where the individual is a sole company director and the main generator of the company's income, the contribution is unlikely to fail this test.
3. Other factors HMRC will examine before allowing pension contributions via your limited company include:
Checking that pension contributions aren't more than the company's annual profits. So, if your company turns a profit of £20,000 in a tax year, £20,000 will likely be the maximum the company can contribute to your pension for that year.
If you employ staff, making sure you're making similar pension contributions to others in your company who are doing work of similar value.
Because of pension schemes' complex nature, it's well worth getting specialist advice from an independent financial adviser. We are not qualified to provide financial advice with respect to which pension products to choose and where to invest, but a qualified financial advisor can help.
What are the other tax-efficient ways to employ cash as a company director?
Dividends can be paid to anyone who owns shares in a company – as long as the company is making sufficient profit to cover these payments. They're exempt from National Insurance Contributions and are discretionary, subject to the company being able to afford to pay them. A shareholder can receive up to £2,000 in dividends in any tax year before paying tax.
You could consider a self-invested personal pension (SIPP) which can offer you a greater range of investment choices. SIPPs are also more flexible as you can invest and manage your portfolio regularly.
An alternative is a small-self-administered pension scheme (SSAS). Unlike other defined contribution schemes, an SSAS must be set up via a trust and must have no more than 11 members. Directors of family businesses often set these up on behalf of themselves and a small number of specified employees to give family members a share in the business's assets and pension.
How do I set up a SIPP?
You can approach a SIPP provider directly and they will steer you through the process. However, a more prudent approach is to go through your financial adviser. An IFA can help you choose the best provider for your needs and work with you to create an investment strategy and portfolio.
How to set up a SIPP:
Identify all your current situation with respect to how much you have available to invest.
Decide how much risk you can take. The rule of thumb is that you can take more risk the younger you are, and the more you earn. Higher risk typically means higher rewards over time, but more likelihood of short-term losses. Remember that taking very low risk is a risk in itself – because your investments may not grow enough.
Identify where and how you want to invest your funds.
Decide who will manage the SIPP. You can do this yourself, or ask your financial adviser to provide a ‘discretionary management service’ where they make the day-to-day investment decisions for you, based on your stated aims.
Can I invest in property through my SIPP?
You can invest in commercial property through your SIPP. You can buy the property through your pension and the pot will benefit from any increase in the property’s value, and will also receive any rent paid on it.
This is particularly useful if you run a business and need business premises. You can buy your own premises through your SIPP, and then pay rent on it – the rent goes into your pension pot, so you ultimately benefit from it. Provided that the rent charged is a fair market rate, this can be a very efficient solution for business owners.
You can’t directly buy residential property with your SIPP, but some SIPPs let you include residential property through certain collective investments, such as real estate investment trusts (REITs).
Tax relief - how is it calculated?
You’ll receive tax relief at the highest rate of income tax that you pay. If you’re a basic rate taxpayer, you’ll get 20 per cent tax relief. This means that every pound you pay in becomes £1.25 (because £1.25 taxed at 20 per cent would become £1).
In other words, receiving 20 per cent tax relief is the equivalent of having a 25 per cent boost to every contribution you make into your pension. This is one of the biggest reasons why pensions are so hard to beat as an investment.
Tax relief on pension contributions for high earners
If you’re a higher-rate taxpayer, you’ll get 40 per cent. This means that every pound becomes around £1.66 – the equivalent of a 66 per cent boost. Additional rate taxpayers get 45 per cent tax relief (effectively around an 80 per cent boost!).
However, this additional tax relief isn’t delivered automatically. The basic 20 per cent tax relief will be added to each contribution, but if you’re a higher or additional rate taxpayer you’ll have to claim back your extra tax relief via your tax return.
What if I don’t have an income at the moment?
If you’re not currently working, or earning below £3,600, you can still contribute to a pension and get tax relief (such as by transferring savings, or having your partner contribute on your behalf). However, you’ll only receive tax relief on contributions up to £3,600. You can pay in more if you wish, but this additional amount will not receive tax relief.
What happens to my SIPP when I die?
A SIPP is treated like any other pension pot if you should die with any of the pot unspent. Your chosen beneficiary can inherit the remaining pot. Find out more about what happens to pension pots when you die.