As a limited company director, securing a comfortable retirement is no doubt a priority. But, as accountants, we see many directors who are not making pension contributions through their company and therefore missing out on a valuable tax-saving opportunity.
Company directors can benefit from extracting money from their business through pension contributions of a value up to £60,000 before paying Income Tax. The company can also report this as an allowable business expense, saving on Corporation Tax.
So, investing in your pension through your company serves a dual purpose: not only do you get to bolster your pension pot and enjoy Income Tax relief, but it’s also a tax-efficient way of using your business profits.
Nobody enjoys paying tax! If you are a limited company director who isn’t making pension contributions, it’s time to start – read on to find out more about how to get tax relief on your pension contributions.
What is pension tax relief?
Pension tax relief is a valuable benefit offered by the government to promote a culture of saving and reduce the burden on the state pension pot.
It provides a way to reduce the amount of tax paid on contributions made into a pension scheme. In essence, it’s like getting tax-free cash from the government to boost your retirement savings.
As a company director, you have the opportunity to benefit from two types of pension tax relief: personal contributions and employer contributions.
How can you extract money from your business and save tax using pension contributions?
As a limited company director, you can contribute to your director’s pension pot through your business in addition to your personal contributions.
The standard annual allowance for director pension contributions was increased in April 2023 to £60,000 (or 100% of your salary, whichever is lower). This means that directors can potentially make huge Income Tax savings.
The good news doesn’t stop there – employer contributions can be reported as a business expense to reduce the company’s Corporation Tax liability and National Insurance Contributions. This means the company can save up to £15k in Corporation Tax per year per director (assuming they pay tax at 25%).
Defined Contribution pension schemes such as this allow you to take a 25% tax-free lump sum when you are 55. Then every subsequent year, you can decide how much to take out. The amount you withdraw will represent your income for that year, on which you will pay Income Tax.
This means you can be in complete control of how much tax you pay each tax year. So, you may wish to ensure your taxable income falls within your personal allowance each year to be as tax efficient as possible.
What registered pension schemes are there?
In the UK, there are three main ways to invest in a pension: the state pension, a self-invested pension or a workplace pension.
There are so many different types of pension savings arrangements, such as the Defined Benefit scheme, the Defined Contribution scheme and the Master Trust Pension scheme. For the purpose of this blog, we won’t go into these in detail, only so much as it relates to tax saving.
Your company can make annual pension contributions of up to £60k to any type of pension arrangement. For example, if your company employs staff and is registered for auto-enrolment, it may be convenient for you to pay into a workplace pension rather than setting up a new one.
Whatever pensions arrangement you choose, it’s wise to get guidance from trusted financial advisers to ensure it’s in your best interest and in line with your retirement goals.
What is a Self-Invested Personal Pension (SIPP)?
A SIPP, or Self-Invested Personal Pension, is a type of pension scheme that allows individuals to have greater control and flexibility over their investment choices within their pension, providing a wider range of investment options beyond traditional pension funds.
A SIPP allows you to invest in shares (both abroad and in the UK), land, commercial property, and trusts. Again, it pays to seek the guidance of a financial adviser and accountant before taking on a SIPP, as they can be very complex.
What is a Small Self Administered Scheme (SSAS)?
A SSAS, or Small Self Administered Scheme, is another type of pension scheme which offers flexibility.
Usually, this scheme is used for company directors and executives within a business, with a maximum of 11 members and run by nominated trustees. A SSAS gives a lot of flexibility in terms of where money can be invested, for example, business premises and business shares.
A SSAS can also loan money to the company, subject to certain conditions and regulatory requirements, such as obtaining a formal agreement and ensuring the loan is made on commercial terms to avoid any potential tax implications or breaches of pension rules.
How much can be paid into your pension?
The standard annual allowance for company pension contributions, i.e. the amount before Income Tax is due, is £60k as of April 2023. It is possible to contribute more and pay tax on it.
For company directors earning beyond the basic rate tax band, a tapered annual allowance is applied. The tapered annual allowance is the amount of pension contributions that you can make each year and still receive tax relief.
For the 2023/24 tax year, the tapered annual allowance is reduced by £1 for every £2 that your adjusted income exceeds £260,000. The minimum tapered annual allowance is £10,000.
Many directors, therefore, choose to keep their taxable income at a minimum by paying more into their pension pots.
How is tax relief calculated on pension savings?
In the UK, pension contributions are taxed when they exceed the personal allowance, but pension savings themselves are not subject to tax while they remain within a pension scheme.
This means that the funds accumulated within a pension, such as contributions, investment growth, and employer contributions, are generally free from tax.
However, it’s important to note that when you start to access your pension savings, either through withdrawals or as regular pension income, you will pay income tax on anything above your personal allowance commensurate with your income tax band.
The tax treatment of pension savings and pension income can be complex and may vary depending on factors such as the type of pension scheme, your personal circumstances, and changes in tax legislation. So before choosing a pension provider or scheme, it is wise to consult a qualified and regulated financial adviser.
Not only can they guide you on the most appropriate pension savings scheme for your circumstances, but they also have great tax planning knowledge. They can help you to put a pension savings strategy in place so that you can achieve the retirement income that you desire.
Archimedia Accounts can help save you tax
At Archimedia Accounts, we are tax specialists and help many limited company directors to reduce their personal and company tax liability.
Our Head of Tax, Barbara, has 30 years of experience in tax planning and can help you to put the right strategies in place to reap tax benefits and secure the retirement income you deserve.
Get in touch today!
FAQs about maximising your pension as a company director
To learn more about maximising your pension effectively, contact a financial planner and check out our FAQs below:
What is the lifetime allowance?
The lifetime allowance (LTA) is the maximum amount of money that you can save in your pension pot throughout your lifetime without incurring a tax charge and stands at £1,073,100 for the 2023 tax year.
However, the charge is due to be abolished in 2024 – a welcome change for limited company directors, allowing them to save even more in their pension, tax-free.
What is the Money Purchase Annual Allowance?
The MPAA is the maximum amount of money that you can contribute to a Defined Contribution pension each year and still receive tax relief.
If you contribute more than the MPAA to your pension, you will not receive tax relief on the excess amount. For the tax year 2023/24, the MPAA increased from £4,000 to £10,000.
See gov.uk for details.
The MPAA is triggered when certain situations arise for example, if you move your pension pot money into a flexi-access drawdown and start to take an income.
How should pension contributions be reported for tax purposes?
Employer pension contributions should be reported on the company profit and loss report as a business expense and included in its Corporation Tax return.
Directors should report pension contributions on their self-assessment tax returns. This includes both employer contributions and any personal contributions made by the director themselves.
If you are a company director, employer pension contributions are a great way to top up your pension pot and save tax.
A company can make a pension contribution to a director of£60k every year without the director having to pay income tax, so it’s essentially a tax-free way of extracting money from the company.
Compared to taking a £60k salary, where you would have higher rate tax liability and pay 40% tax, it’s easy to see the benefit!
On top of this, the company saves tax as employer contributions are classed as an allowable expense. Let’s say the full £60k employer pension contribution is made, then the company would save £15k of corporation tax (if paying tax at 25%).
So in total, you could potentially save up to £39k in tax for each director of the company!
To learn more about tax-saving strategies as a company director, check out our blogs here:
*please note we are note financial planners or pensions planners. For help and advice regarding pension schemes specifically, please contact a financial or pension planner.