It’s a well known fact that the State Pension on its own won’t cover most individuals’ cost of living so it’s more important than ever to be thinking about the future and planning for retirement.
Tax efficient pension contributions
A tax efficient way of making pension contributions is for your limited company to make employer contributions into your personal pension pot. Pension contributions are made out of pre-taxed company profits, in other words, as long as they are made ‘wholly and exclusively’ for business purposes they are an allowable expense and reduce the company’s Corporation Tax bill.
This can be a handy way to reduce Corporation Tax at the last minute but it’s worth leaving enough time towards the end of your company’s year to process any pension contribution, particularly if you don’t already have a scheme in place. HMRC rules are that the pension contribution has to be paid and received by the pension provider prior to the year end to receive the tax relief in that year. If it falls into the following year, tax relief could be delayed for a year.
How much can be contributed?
There is an annual allowance for tax relief on pensions which is £40,000. This limit applies per individual and includes both employer pension contributions and any personal/employee contributions made. It’s worth noting the annual allowance can be reduced once threshold income (total income before tax minus any personal pension contributions) starts to exceed £200,000.
As a director and shareholder of a limited company, if you choose to withdraw a smaller salary and larger dividends it’s only your salary that would be used to calculate the tax relief threshold for any personal contributions. This limit doesn’t apply to company contributions which means more of the £40,000 annual exemption can be utilised.
If you were an active member of a pension scheme in the previous three years you may also be able to utilise any unused allowances from these years.
There are a few different pension types such as a self-invested personal pension (SIPP) which usually offer a wider range of investment options to a normal pension scheme. Another option is a small self administered pension scheme (SSAS).