As a limited company owner, contributions to pension can bring you and your employees some advantages. Pension contributions can be considered as an allowable business expense also, it can be offset against your company’s corporation tax bill.

Based on the government’s auto-enrolment arrangements, you already need to put up an amount into your employee’s pension fund. Considering the advantages, you might want to consider contributing a little more than usual.

How does it work for you?

Both of the following options have tax advantages. However, your suitable option depends on your individual circumstances.

Limited Company: If you’re an owner of a limited company, you can make contributions through your company. As already mentioned, pension contributions can be offset against your company’s corporation tax bill as it is treated as an allowable business expense.

Personal Contribution: You can make a pension contribution from your personal funds, and the amount that you invest will attract personal tax relief. However, most of the London Accountants believe that making the contribution through your limited company is usually more tax-efficient than making the contribution from your own funds.

Pension schemes can be complicated, so we suggest you take expert advice from a financial advisor before making any contributions. At Taj Accountants, we offer you a wide range of consultancy and advisory services as per your requirements.  

How can you make a personal pension contribution?

Your personal pension contribution does not consist of a limit, but there are limits to the amount you can contribute and still receive tax relief which is currently 100% of your income, up to a maximum of £40,000. If your earning is less than £3,600 annually, you can contribute up to your pension within the tax relief limit of £3,600 including government tax relief. 

After making payments into your pensions you tend to receive a tax relief that reflects the rate of income tax you pay. Which means you only pay £100 to save £125 into your pension (as a basic rate taxpayer). 

Our taxation services for individuals can help you get more insight regarding your taxation issues. 

How can you make employer pension contributions directly from your limited company?

An employer contribution counts as an allowable business expense, so your limited company can contribute pre-taxed company income to your pension. You can save up to 19% in corporation tax as our company receives tax relief against corporation tax.

When you make an employer pension contributions, you must follow the rules for allowable deductions which states that the pension contributions should be ‘wholly and exclusively’ for the purposes of business. 

From employer pension contributions, your company can save up to:

• 13.8%  by contributing directly into your pension rather than paying the equivalent in salary as a benefit states that employers don’t have to pay National Insurance on pension contributions (the National Insurance rate for 2020/21 is 13.8%).
• 32.8% in total by paying money directly into your pension rather than paying money in the form of a salary. 

Personal pension contributions as the director of a limited company:

If you’re a limited company owner and you happen to take both salary and dividends, the dividends won’t get counted as ‘relevant UK earnings’. In case of this, to calculate your pension tax relief limit, only the amount of money you take as income will be used. It means, if you take a small salary and a large dividend from your company, and your pension tax relief limit will be low, and you’ll face tax charges if you exceed your limit.

How can you increase the amount of money you pay into your pension as the director?

As the director of a limited company, if you want to increase the amount of money you can pay into your pension and still consider enjoying the tax benefits, you can either,

• consider increasing your salary or, 
• you can make the pension contribution straight from your company as - employer contribution. 

Again, due to the complex nature of pension schemes, we recommend you take specialist advice from an account in London before making any contributions. 

How much can you contribute to your employee’s pension scheme?

You’re allowed to pay as much into your employee’s pension scheme as you like, subject to HMRC’s contribution limits and rules. Your contributions will be tax-free as long as they do not exceed the annual allowance, which is currently capped at £40,000 for the 2020/21 tax year. Remember that, the amount that you pay must not exceed your company’s income for the year. 

If you want to put a large amount into your employee pension scheme, then you may be able to take advantage of the carry forward rule. The rule allows you to make use of annual allowances that have not been used in the past 3 years, provided that the employee was a member of a registered pension scheme. To carry forward, initially you must use your full annual allowance for the current tax year before using any unused allowances from the previous 3 years. 

How can we assist you?

At Taj Accountants, we offer a wide range of accounting and taxation advice to corporates, as well as individuals. We aim to provide you a range of accountancy services as well as tax services and advice, accounting services, payroll, tax return, accounts for self-employed and accounts for limited companies to clients throughout London. 

FAQ

When can you start withdrawing from your pension fund?

You can start withdrawing from your pension fund at the age of 55. It can help you retire early or to top up your income if you are still working. Again, you should take expert advice on this, particularly if you plan to keep working while drawing a pension. For instance, contact accountants in East London for any financial trouble. 

How much can you withdraw from your pension scheme?

The lifetime allowance is currently £1,073,000 in 2020/21 which increased from £1,055,000 for last 2019/20 Tax year. This is the amount which can be withdrawn from your pension scheme through either lump sums, or through retirement income, without incurring extra tax.

DISCLAIMER: The purpose of the blog is to provide information and insight regarding the situation. The readers must contact experts before making any decisions based on the information. We highly appreciate you to contact Taj Accountants for further assistance