Payroll and Pensions – Benefits for Limited Companies

If you’re a director of a limited company, you can contribute pre-taxed company income to your pension pot. What’s more, because an employer contribution counts as an allowable business expense, your company will also receive tax relief against corporation tax.

Can I contribute to my pension via my limited company?

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?

Unlike personal contributions, there’s no limit on what the company is allowed to pay into your pension and obtain tax relief, providing it meets HMRC’s ‘wholly and exclusively’ test. Employer contributions are also not limited to your relevant UK earnings, but do count towards your annual allowance, which is currently £40,000.

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.

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

A company director can personally contribute £40,000 or 100% of PAYE income and still get tax relief. Depending on your earnings, you’ll receive tax relief at your highest marginal rate, either 20%, 40% or 45%.

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

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, but always check with an accountant that specialises in small businesses.

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.