Need To Know: Limited Company Pension Contributions.
Limited company pension contributions offer a great opportunity to take advantage of available tax breaks. Both for your own pot as a director and your employees’ as an allowable business expense - this pre-taxed income can be a welcome saving boost.
While there are laws stating the minimum amount you must contribute to your employee’s pot - the advantages that come with making limited company pension contributions may be worth adding more.
Adding To Your Personal Pot
As the company director, you are able to add to your own retirement savings in two ways.
1. As a business through employer contributions.
2. As an individual.
The advantage here is that you can claim tax relief on both of those contributions. However, bear in mind that if you take both salary and dividends, the dividends do not count as UK earnings. This means that only your income will be used to calculate a tax relief limit. Exceeding your limit could result in charges, negating the benefits of limited company pension contributions..
To get around this, you’d have to increase your annual income or utilise the employer contributions as a sole addition to your savings.
Let’s take a look a bit more closely…
Option 1
This is usually more tax-efficient because of the fact it is considered an allowable business expense. This means that the amount can be offset against the company’s corporation tax bill.
Paying the money directly into your pot this way means you mitigate the need for National Insurance payments as long as the contributions are exclusively business-related. (I.e
HMRC can see that all employees are receiving the same limited company pension contribution percentage etc.)
The National Insurance rate for 2022/23 is 15.05%, so by adding to your fund through employer contributions, rather than paying the equivalent in salary, you save up to 15.05% in tax relief.
Option 2
Making the payments as an individual means you receive tax relief based on the amount of income tax you pay.
You can receive relief on up to 100% of your annual salary to a maximum of £40k.
This means that paying the standard 20% tax rate would see your £100 contributions become £125 and so on. Similarly, with the higher bracket - you would be entitled to a higher rate of tax relief.
However, as we mentioned above, any dividends do not count towards allowable income and so are not eligible for tax relief. If you’re looking to maximise the tax break, it can be more advantageous to either increase your salary or go for option 1.
How Much Can You Contribute?
You can add as much as you like through the employee scheme, subject to HMRC allowances.
- £40,000 annual allowance
- £1,073,000 lifetime allowance
Exceeding these limitations will see you or your provider incur charges. If your provider pays these either voluntarily or as part of a mandatory scheme pay - they must also reduce your benefits.
Because of this, we always advise keeping any eye on your contributions or speaking to an expert if you’ve lost track. We can help you devise a plan to ensure you’re making the most of your savings and not heading towards exceeding an allowance.
Increase Limited Company Pension Contributions With Carry Forward
If you haven’t paid out to any pension funds yet but your business has been up and running for a while, you could carry forward those unused contributions from the three previous tax years in order to boost anything you add beyond the £40k limit. However, you do need to ensure the business:
Increase Limited Company Pension Contributions With Carry Forward
If you haven’t paid out to any pension funds yet but your business has been up and running for a while, you could carry forward those unused contributions from the three previous tax years in order to boost anything you add beyond the £40k limit. However, you do need to ensure the business was registered into a UK scheme during those years.
Doing this could mean that in 2022 you could pay up to £160k if you hadn’t added anything in 2019, 2020 or 2021. You’re carrying forward the allowance, but still won’t be able to exceed 100% of your earnings for the year as personal contributions.
Schemes Available To Directors
There are four main pensions you will have to choose from as a director. Carefully consider the benefits and drawbacks of each one or speak to our team for expert advice before making a decision.
● Stakeholder & Group Stakeholder
● Multi-employer Schemes (e.g. NEST)
● Self-invested Personal Pension (SIPPs)
● Small Self-administered Schemes (SSAS)
Stakeholder Pensions
This type of scheme comes with low and flexible minimum contributions, capped charges and a default investment strategy. This can give you peace of mind should you not want to or feel confident to make your own investment choices.
However, these schemes must also meet minimum government standards including:
A limit of 1.5% a year for the first ten years, then 1% a year on all charges. (This is capped at 0.75% for employers meeting auto-enrolment requirements with this type of scheme.)
Charge-free transfers
No penalties if you decide to stop adding funds at any point or if you decide to re-start down the line
Minimum contributions of no more than £20
While this option comes with many benefits, you do have a reduced choice of investment opportunities compared to other schemes available to you.
The group version simply means each employee will have their own personal pot - but it is run by a group. This is particularly popular for directors who are setting themselves up and want to complete auto-enrolment for their staff at the same time.
Multi-Employer Schemes
Since auto-enrolment was introduced for employers, it is now mandatory for all eligible employees to be part of a workplace scheme and employers must contribute. This scheme, sometimes known as a ‘master trust’ is one popular way in which you can make limited company pension contributions.
Instead of offering an exclusive scheme only available to your employees and you as an employer, these schemes and their benefits can be used by many unrelated employers.
The benefits of a multi-employer scheme like NEST include tax relief on your additions as a government subsidy. Of course, you also receive a boost from employer contributions.
SIPPs
A self-invested personal scheme offers you a broader range of investment options than Stakeholder schemes and allows you to be more involved in the process. It’s a good idea to consult with an adviser or be extremely clear on the risks and advantages associated with different investment options before taking too much control.
However, for experienced investors there will be different areas to choose from including but not limited to:
Insurance companies
Banks & building societies
Commercial property
Government securities
However, you may experience higher charges to reflect this more varied and sophisticated setup.
Small Self-Administered Schemes
These schemes don’t usually cover more than 11 individuals as they are primarily used for company directors and key staff.
Deciding to open one of these schemes requires a lot more administrative management typically from the members themselves. While this means you will have far more control over your limited company pension contributions - it does mean you’ll have to ensure the following:
● You register with The Pensions Regulator
● You operate tax relief under the relief at source system
● The pension is registered with HMRC and you supply all required receipts, returns and report events relating to the scheme
● You supply all necessary information to other members regarding allowances, benefits and transfers
● You pay any accrued charges
While these responsibilities may seem like quite a handful, it does offer you benefits.
Firstly, some schemes allow you to implement loans to sponsoring employers such as your own limited company.
As well as this, you may be entitled to use up to 5% of the funds to invest in shares of your limited company. This results in the scheme becoming an investor in your company which is not possible with SIPPs.
Your Financial Future
Having a secure plan in place can make limited company pension contributions a lot less confusing and gives you the opportunity to make use of available tax breaks.
Proper planning is the key to improving your financial wellness. Your personal and business plan is a roadmap to success. You’ll see exactly what you need to do now to make a significant difference for your own future and that of your employees.
It is important to think about how many investment decisions you are willing to make as well as the benefits you are looking for within your scheme. These will all be deciding factors to the type of limited company pension contributions you make as a director.
However, if you’re still unsure about how to manage any aspect of a scheme or would like some further direction, please get in touch with one of our pension experts.
A pension is a long-term investment. The fund value may fluctuate and can go down.
Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.
Get in touch for help.
Get in touch with us today if you’d like to review your situation. As our name suggests, we have a wealth of knowledge in the field of pensions and can help you in making these all-important decisions before you take the plunge into retirement.
