A common question I am asked is if it is beneficial for limited company directors to make pension contributions through their limited company, and if so how can they benefit.
In this article I will be outlining the benefits to directors of making pension contributions through their limited company.
Note - for certain employees it is a requirement to make pension contributions via auto-enrollment. I will not cover this in the article, however for further advice please contact me at email@example.com
Pension contributions are accounted for as an expense for corporation tax.
Any pension contributions made by the company including deductions from your pay as a director therefore reduce the companies corporation tax liability.
For the 20/21 tax year corporation tax is charged at 19% on profits. So for example a pension payment of £100 will reduce the companies corporation tax liability by £19, therefore the £100 contribution has a net cost of £81.
How much can I pay into my pension via my limited company?
Pension contributions are taxed above the annual pension allowance of £40,000 (tax years 20/21 and 21/22).
In addition, pension contributions should not exceed the companies turnover for the year as this will raise questions with HMRC.
If you have an amount larger than £40,000 that you would like to put into your pension scheme, then you may be able to take advantage of the carry forward rule. This rule allows you to make use of annual allowances that have not been used in the previous three years, provided you are a member of a registered pension scheme.
Generally, you can start making withdrawls from pension schemes from the age of 55. This is applicable regardless of if you continue working.
For the pros and cons of different pension schemes I recommend seeking advice from a professional pensions advisor. I can provide contact details of independent pensions advisors that clients of mine have taken from advice from.
I will be happy to answer any questions you may have.
This article was written by Will Farmer MAAT,
AAT Licensed Accountant and Director of Matrix Accountancy Services Limited.