Find out the differences between contributing to your pension as an individual vs as a company.
We will cover:
- The benefits of contributing to your pension personally vs as a company
- Tax reliefs which you can get as a limited company director
Pension contributions as a limited company director
If you own and are the director of your own limited company, you can make contributions to your pension individually or through the company. Our article explains the main benefits and differences between them.
In owner-managed limited companies, the owner/director could be the only employee. Therefore, personal and company pension contributions are made in the name of ‘employee’ and ‘employer’.
Both can be tax-effective in different ways. Let’s look at the key differences:
Limited company director contributing to their pension as individual
In this case, the owner/director contributes through the income they are personally paid.
It can be beneficial as it attracts basic rate tax relief, which is added to the pension contribution. Relief for Higher/Additional rate tax payers can be claimed by filing a self-assessment tax return.
The major limit on this relief is the salary drawn, which will affect those on a smaller salary the most.
An individual can contribute up to 100% of their “relevant” earnings, which include salary but not dividends. These contributions are also subject to their available Annual Allowance for tax relief.
Limited company director contributing to their pension as the company
In this case, rather than drawing extra income to pay a pension contribution personally, it can be paid by the company.
These contributions are not limited by the individual’s relevant earnings, but must meet the “wholly and exclusively” rule, making sure the pension payments are suitable for that individual, and their role.
This rule assures HMRC that the pension contribution is wholly and exclusively for the employer’s trade or profession. Pension contributions are business expenses which fit this category.
Company contributions are liable for tax relief. For this reason, there is a reduction in amount of Corporation Tax at a rate of 19%
In summary, as a limited company director, you can contribute to your pension either by paying from your personal income or directly by your company.
By paying through your limited company, this is like giving yourself a bonus, but only reaping the benefits later in the future.
If you earn below £3,600 from your relevant income you can only get tax relief on up to £2,880.
Note that you can only get tax relief on contributions of up to £40,000 a year or 100% of your PAYE income, whichever is lower.
For further tax advice, be sure that you consult with our team of tax experts.
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