Tax relief on your pension is one of the most valuable tax breaks available. Follow the simple steps below to calculate how much you could get back in tax relief when you pay into your pension.
If you’re the boss of your own limited company, there’s no one to provide a pension for you. That’s why it’s so important to set up a directors pension yourself.
As a director, you can make contributions to the pot both as an individual and via your limited company. Fortunately, it’s possible to claim pension tax relief not only on your contributions as an individual but also on contributions made through your business.
This guide explains pensions for company directors, including how to start saving and the different types of pension you could set up.
As the boss of your own limited company, you can contribute to a company directors pension both as an individual and as a business. These are known as employee and employer pension contributions, respectively.
The absolute maximum a company director can contribute to a pension and still get tax relief — including both employer and employee contributions — is £60,000 per year or 100% of your salaried earnings, whichever is lower. This is known as the pension annual allowance.
However, this figure starts to taper down for those earning more than £260,000 by £1 for every £2 they earn above this threshold.
IMPORTANT NOTICE 🧐
The following information on tapering the annual allowance is subject to change in April 2023.
This is subject to a maximum tapering of £30,000, leaving anyone with an income of £210,000 or more with an annual allowance of just £10,000.
As an individual, you can only contribute 100% of your salaried earnings, which for company directors is often only a small proportion of their remuneration for tax purposes.
As you can’t count your dividend drawdown as salary for the purposes of increasing your pension contributions, in reality, this often means that the bulk of contributions to a pension for company directors are made up of contributions by the business.
As mentioned, the maximum pension contribution for company directors on which you can get tax relief is a gross payment of £60,000 per year. This includes employer and employee contributions.
The maximum a company director can contribute to a pension personally each tax year and still get income tax relief is limited to the lower of £60,000 or 100% of PAYE income. You’ll receive tax relief at your highest marginal rate, so 20%, 40% or 45% depending on your earnings.
This means as a basic rate taxpayer, a £100 gross pension contribution will actually only cost £80, because the government will add £20. As a higher rate taxpayer, a £100 contribution will only cost £60 because the government will add £40, made up of £20 at source and £20 you’ll have to reclaim later via your tax return.
You can calculate your pension tax relief in our handy calculator below.
The PAYE cap can be problematic for company directors, whose PAYE salaries tend to be small and topped up with dividends to help mitigate tax exposure. Here the company can step in to boost pension contributions above the PAYE cap up to the individual’s annual allowance. Typically, corporation tax relief at 19% is available on employer pension contributions.
The cap of 100% of earnings doesn’t apply to company contributions, so your company can contribute up to the full £40,000 regardless of your earnings.
Yes, providing the employer contribution passes the ‘wholly and exclusively’ test, meaning the employer pension contribution must be deemed ‘wholly and exclusively’ for the purposes of the employer’s trade or profession.
The first step HMRC will take is to establish whether the level of total remuneration — i.e. 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 driving force behind generating the company’s income, the contribution is unlikely to fail this test, but it’s always best to consult your accountant.
Other factors HMRC will examine before allowing pension contributions via your limited company include:
Tax treatment varies according to individual circumstances and is subject to change. Consult your accountant before making any large employer pension contributions.
As well as getting corporation tax relief on premiums at 19% in the 2023/24 tax year, there’s no employer National Insurance contributions to pay on pension contributions made via a limited company, either.
Employer National Insurance contributions are paid at a rate of 13.8%, so making contributions via your limited company saves not only 19% corporation tax but also 13.8% employer National Insurance contributions for a total saving of 32.8%.
Depending on your tax position, this may be more tax-efficient than making pension contributions personally, especially if you find yourself limited by how much you can pay into a director pension personally because of the 100% of PAYE earnings rule.
For those with an income of more than £100,000, your personal allowance starts to taper down to zero. The personal allowance is the amount you can earn before you have to start paying income tax.
The income tax personal allowance is £12,570 in the 2023/24 tax year. This means that if you earn more than £125,000 your income tax personal allowance is reduced to zero and you effectively pay 60% tax on the earnings above £100,000.
One way to reduce your tax liability here can be to make an employer pension contribution, which is possible as a dividend receiving director. This can bring your earnings below the £100,000 threshold and potentially therefore reduce your tax bill.
Check with your accountant and / or a financial adviser before making pension contributions with the aim of reducing your tax bill, as this is one area where you definitely don’t want to fall foul of any HMRC rules!
Head of Financial Planning at Drewberry
If you’re a company director and you haven’t yet made any contributions to your pension but your company has been running for a few years, you have the potential to carry forward unused pension contributions from the previous 3 tax years to the current tax year to boost your pension contributions above the 2023/24 £60,000 limit.
That said, you can carry over any leftover allowance from the previous 3 years, as long as your company:
Imagine you set up your company in 2020 and didn’t make any pension contributions in 2020, 2021 or 2022.
That means that in 2023, your limited company could potentially pay in up to £180,000 into your pension, as long as it makes at least £180,000 of profit in that tax year.
As a company director, you have access to an array of pension options. These include:
Stakeholder pensions are perhaps the simplest form of personal pension available on the market today. They must meet minimum standards set by the government. These include:
Although stakeholder pensions are simple to contribute to understand, this comes at a cost. There’s a limit on the types of investments that can be held in a stakeholder pension, so you have limited investment choice compared to some of the other types of pension on the market.
However, if you’re looking for a simple pension that you and your company can contribute to with low charges and a default investment fund, a stakeholder pension could be the best option.
Given that these pensions are relatively simple, you can set up a stakeholder pension yourself in a number of ways, including online. Alternatively, you can use a financial adviser.
Group stakeholder pensions are a collection of stakeholder pensions sometimes offered by companies to individual employees. Each employee still gets their own individual stakeholder pension, but they’re administered by a group. This is useful if you’re a company director who wants to set up a pension for yourself and your employees, as you must do under the auto-enrolment rules.
A self-invested personal pension (SIPP) offers access to a wider array of funds and investments than a stakeholder pension. You also tend to be more ‘hands on’ with a SIPP, choosing where you want to invest your retirement savings.
These pensions are usually for more sophisticated investors who have experience with investing as there’ll be a wide variety of assets and funds you can opt to invest in, such as:
SIPPs usually have higher charges than stakeholder pensions to reflect the fact that they’re more complicated. Higher charges are also due to the fact that you have access to a wider array of investments.
If you’re unsure or need further advice on which type of pension is right for you, give us a call on 02084327334. Given that SIPPs are more complex than stakeholder pensions, it’s usually best to use an adviser to set one up.
A small self-administered scheme (SSAS) is usually set up to provide retirement benefits for one or more company directors and key staff. Typically, the number of employees covered by a SSAS is no more than 11.
While the tax rules surrounding an SSAS are similar to a SIPP insofar as tax relief on director pension contributions is concerned, the other rules surrounding investments and management of the pension are very different.
An SSAS requires far more in the way of management and administration compared to a SIPP.
With a SIPP the trustees and scheme administrators are generally one in the same — the provider of the SIPP. An SSAS, on the other hand, requires trustees to administer the scheme, with this duty typically falling to members.
As a trustee/scheme administrator of a pension plan, you must:
As you can see, there’s a lot more work involved in setting up, managing and administering an SSAS compared to a SIPP.
However, while there’s more effort required with a small self-administered pension scheme, there are also some benefits open to any company administering an SSAS.
Compared to a SIPP, small self-administered pension schemes have some advantages to directors and their limited companies that you may look to take advantage of.
Subject to certain conditions, SSASs can lend money to sponsoring employers (i.e. your limited company), whereas SIPPs are forbidden from making loans to any members or person / business connected to a member.
An SSAS can also use up to 5% of its fund to buy shares in the sponsoring employer, technically allowing the pension scheme to own 100% of your company’s shares providing this does not exceed 5% of the total fund.
This allows an SSAS to invest in the company. In comparison, with a SIPP you can’t invest in any company controlled by a SIPP member or an associated person, as this is regarded as investing in ‘taxable property’ and incurs charges.
Small self-administered pension schemes are far more complicated than a stakeholder pension or even a SIPP.
If you want to take advantage of any of the above benefits, it’s vital that you seek professional advice to avoid any problems further down the road.
Senior Paraplanner at Drewberry
Since the introduction of auto-enrolment, it’s become mandatory for anyone employing people — even one person — to provide some form of pension for those workers.
This could be a workplace pension, which would be provided for workers by just one employer. However, multi-employer pension schemes exist to make it easier to offer pensions for employees and provide pensions to multiple different employers. The biggest and best-known of these is the National Employment and Savings Trust (NEST).
As a company director, if you employ people you have a duty to provide them with pensions. You can use NEST to provide these pensions if you wish, or you may wish to set up your own occupational scheme.
Solo company directors who employ no other people don’t have to provide themselves with a pension, but can choose to do so if they want. Providing you don’t employ any other people, you can get a pension as a self-employed director via NEST.
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