Can I make pension contributions through my limited company?

Pension contributions are considered as one of the best tax wrappers available to limited companies in order to reduce their corporation tax liability. As a company director, you can avail significant benefits for making pension contributions. If you are running a limited company, these pension contributions can be treated as allowable business expenses that a business can use to reduce their corporation tax bill, whereas if you are running your own business as a limited company, you can make either personal contributions or contributions through your limited company. As per the government’s auto-enrolment scheme, you already need to contribute a certain amount to your employee’s pension fund, but you can avail more tax advantage by contributing more to the employee’s pension fund.

Making pension contributions through your limited company

Paying pension contributions through your limited company is a tax efficient way of reducing your taxable profits that leads to reduction in your corporation tax liability. Making pension contributions through your limited company is more tax efficient rather than making it through your own funds.

There are various types of employee pension schemes into which an employer contributes through a limited company. Due to the complex nature of pension schemes, it is suggested that you must take advice from a professional expert before making contributions to an employee pension scheme including your own.

You should speak to an independent financial advisor to know how much contribution you can make into your employee’s pension fund scheme, how much amount you can save through pension contribution etc.

Also See: Pension Protection Fund – 14 Important Points For Pensioners

How much tax can I save on pension contributions?

The current corporation tax rate is 19% to 25%. It means that you are paying a corporation tax of £19 or £25 on every £100 your company is earning as a profit. After making deductions (£100 - £19), the dividends available for you to withdraw is £81, which will be a further tax of 8.75%/33.75%/39.35% depending on your marginal rate of tax. Hence, putting a £100 into pension fund scheme costs only £81 to your company and you because of reduction in corporation tax payable and hopefully the same amount of £100 can grow later within the pension fund.

Let’s consider an example - X Ltd is a company engaged in information technology activity. To keep it simple, the company has only one director. Please see below financials for the company with and without pensions.

Also See: The Essential Guide to Workplace Pensions & Auto Enrolment for Employers

The company can save an additional £15,900 in Corporation Tax and the director receives an additional contribution of £60,000 free of income tax and national insurance contribution, albeit it’s in their pension pot and will grow tax-free.

Also See: What is an Excise Duty in the United Kingdom?

How much can I contribute to my employee’s pension fund scheme?

Generally, there is no limit to the amount you can contribute to your employee’s pension fund scheme, but you need to take care of HMRC rules and limits of contribution before going further.

Employees don’t have to pay any tax on contribution amount until you exceed the limit of tax fee allowance of £60,000 (2023/24 tax year). The amount you pay into your employee’s pension fund scheme must not exceed the annual income of your company or should be reasonable as it can become an issue with HMRC; HMRC can raise questions on whether the amount has been actually made wholly and exclusively for trade purposes.

In case you want to put a large amount into your employee’s pension fund scheme, you can take the benefit of the carry forward rule. With the carry forward rule, you can make use of your unused annual allowances of the previous 3 years. You need to meet the following conditions in order to qualify for carry forward rule-

• 1. You must have remained a member of a UK registered pension scheme in that tax year from which you are taking unused annual allowance for the current year.
• 2. You can go maximum 3 years back for availing unused annual allowances. Before using any of the unused allowances from the previous 3 tax years, you must include the full annual allowance of the current tax year. For example – Suppose, you are planning to contribute a large amount into your employee’s pension fund in 2023-24 and have annual unused allowances for 2022-23, 2021-22, 2020-21 tax years. Firstly, you will use the current tax year allowance i.e. allowance for 2023-24, after that you can avail the unused annual allowance of the first of the previous 3 tax years i.e. 2020-21 then for 2021-22 tax year and further for 2022-23 tax year.
• 3. As per carry forward rule, you are able to make a maximum tax-free pension contribution up to £180,000 i.e. £40,000 tax free unused allowance for each tax year plus the current year tax free allowance of £60,000.
• 4. You also need to consider the lifetime allowance limit i.e. limit on the maximum amount you can contribute into a pension scheme over a lifetime, without incurring extra tax. The current amount of lifetime allowance for 2023-24 tax years is £1,073,100. The lifetime allowance will be abolished from 6 April 2024.

Also See: Why is SSAS such a great pension option for directors?

At what time can I start withdrawing from my pension fund?

Normally, people can start withdrawing from pension funds at the age of 55 (57 from 2028-29), with the first 25% available to withdraw lump sum without paying any tax. Please note withdrawals from pension pots are taxable income. It is basically done to help people who retire at an early age. It is recommended that you must take the help of a professional expert if you are planning to continue your job while drawing a pension.

In case you want more information on making pension contributions through a limited company, kindly book a call with us.

Also See: Guide Income Drawdown or Drawdown Pension Calculator taxes HMRC

Disclaimer - "This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".

About the author

Gabi Boghean
I have been working as a UK accountant since 2008 and experienced in providing services to various types of businesses. I have completed management level CIMA qualification & a degree in economics. I specialise in handling tax planning, year-end review meetings, IR35 contract reviews, IR35 expert advice, closing down illustrations and assisting with the closing down process as well.