May 30, 2023 Company Pension Contributions for Directors 2023/24 update If you work through your own limited company, it can be very tax efficient to have your company make pension contributions directly into your pension scheme. In this article we will explain why this can be tax efficient and how it compares to making personal pension contributions. Please note that we are not pension advisors so we cannot give specific pension and investment advice. If you are interested in starting a pension, we would strongly advise that you discuss your specific circumstances with a pension advisor. This article is based on the 2023/24 tax year. Personal vs company pension contributions To start with we need to explain the difference between pension contributions made personally and contributions made by your company (also called employer contributions). As a limited company owner / manager you should ensure you are a director of your company to justify the company pension contributions. Contributions made by your company are paid directly from your company bank account into your pension scheme – you need to check with your pension provider that they can accept company contributions. The pension provider must be told that these contributions are ‘employer’ contributions, this will ensure they are treated correctly for tax in the pension fund – unlike personal contributions, they will not be ‘grossed up’, which means that if £100 is paid by your company, £100 is what goes into your pension, there is no additional tax credited like there is usually with personal contributions. Contributions made personally are from your own pocket and when paid into your pension fund are normally grossed up by 20%. For example, if you pay £80 into your pension fund, £20 of tax credit is added by the government and your total pension addition is seen to be £100. Typically, with personal contributions if you are a basic rate tax payer you get no additional benefit through your personal tax return, you just get the 20% tax added into your pension fund, but if you are a higher rate tax payer you usually save an additional effective 20% tax through your personal tax return (depending on how far you are into the higher tax band compared to the total gross pension contributions made). Do bear in mind that personal pension contributions are made out of your own pocket so you will have potentially paid income tax on your salary / dividends already, which differs to company contributions as they are paid directly into your pension. Personal pension contributions will also usually have a lower annual limit than company contributions. This is because with personal contributions you are limited to your total gross pension contributions not being higher than your earnings, and your earnings include your salary from your company but do not include your dividends, therefore for a typical limited company director their earnings for 23-24 may only be £758 per month salary, which is £9,096 for the year. Company contributions don’t have this limit, although they do have other limits which we discuss further in this article. Employer pension contributions We are focussing on employer (company) pension contributions as they tend to be the most effective structure for limited company directors (but as mentioned you should discuss your own specific circumstances with a pension advisor). When a company makes employer pension contributions into a pension fund, the company is allowed to treat these contributions as a business expense just like with a director’s salary, so the company saves corporation tax on the cost. The corporation tax rates for 23-24 range from 19% to 26.5% depending on the profit level of the company. A benefit with company contributions compared to personal contributions is that you are getting some tax savings up front rather than in your pension fund which you can’t access until later in life. One thing to be aware of is that HMRC will only allow the corporation tax savings as long as your salary, any benefits-in-kind and pension combined are not seen to be ‘excessive’ for the role you are performing in the business. For example, if you have a salary of £758 per month which is £9,096 for the year, and there are also £20,000 of employer pension contributions, HMRC would look at this total remuneration of £29,096 and make sure it’s not excessive for the role being performed. In reality for an owner / manager working full time it would usually only be if you are making very large company contributions that you would start to get into dangerous territory and risk a HMRC challenge. However if you are paying your spouse a salary and also making company pension contributions for them (make sure they are a director or company secretary) this is where things do get riskier if they are not performing a senior and full-time role in the business, so we would not recommend going too high with their contributions. Things to consider when assessing if your contributions are excessive: How much would you have to pay someone to do your role What is your level of experience and how senior is your role How many hours do you work i.e. how full time is your role Is the company making sufficient profits to support the level of contributions Company pension contribution limits There are some limits to be aware of with company pension contributions. The total maximum gross pension contributions (company and personal) per person is £60,000 per year for the 23/24 tax year. If your ‘adjusted income’ is above £260,000 (23/24 tax year) then there are rules that reduce this £60,000 annual allowance – typically ‘adjusted income’ is your total taxable income plus any employer pension contributions. Also, you may potentially have un-used allowances from previous years you can bring forward to increase this limit (check with your pension advisor). Your annual allowance might also be lower if you have flexibly accessed your pension pot. There used to also be a lifetime allowance but this was scrapped from the 23/24 tax year. Summary For limited company owner / managers who have plenty of profits in their business and are already maximising the basic tax band, company pension contributions can be a tax efficient way to save for their future. However, you have to also bear in mind that you won’t be able to access your pension until later in life. Generally, overall there is not a lot of difference between the tax savings of personal contributions compared to company contributions, however for limited company directors, employer pension contributions are often more suitable because: company contributions are typically allowed to be higher than personal contributions as your total contributions are not limited to your salary you get tax relief up front with the corporation tax savings, rather than in your pension fund they don’t affect your personal tax return and salary / dividend planning so tend to be a bit simpler to understand Finally, please bear in mind that making company pension contributions is using company cash so it will mean there are less profits available for dividends. Disclaimer