True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
Category: Financial Planning
Running a business can be fiscally challenging, so it’s important to identify opportunities to save wherever possible.
If you are the director of a limited company, pension contributions are among the most efficient and valuable tax breaks available.
Making contributions directly from your company instead of your salary allows you to reduce both your taxable business expenses and your Income Tax. This not only enhances your overall tax efficiency but also helps align your long-term financial goals with the stability of your business.
Read on to find out more about how making pension contributions from your limited company can benefit you and your business.
When making pension contributions from your limited company, there are two main tax savings for your business:
When it comes to Corporation Tax, HMRC considers company contributions to your pension scheme as an “allowable expense”, which isn’t the case for the contributions you make from your salary.
This means you can offset the limited company’s pension contributions against its Corporation Tax bill, helping to lower the overall tax liability and boosting efficiency.
For the 2024/25 tax year, Corporation Tax is set at:
So, by making pension contributions through your limited company, rather than your salary, you can mitigate these taxes, which could potentially result in significant savings for your business.
With regards to NI, employers – including company directors – are not required to pay NI on pension contributions as they are on salaries.
The employer NI rate is set to increase from 13.8% to 15% from 6 April 2025. So, contributing directly to your pension instead of paying the same amount as a salary could result in substantial savings for your company.
Pension Bee reports that making pension contributions rather than paying money in the form of your salary could save your business up to 38.8% in tax and NI.
However, whether this approach is right for you depends on several factors, including your company’s profits, your income structure, and your personal financial goals.
In addition to the tax benefits for your company, making pension contributions through your limited company can also improve your personal tax efficiency.
When you pay money into your pension, you receive tax relief at your marginal rate of Income Tax.
Although there’s no limit on the amount you can personally pay into your pension, there is a limit to the amount you can contribute and still receive tax relief. This is known as your “Annual Allowance”, and in the 2024/25 tax year, it stands at either £60,000 or 100% of your income, whichever is lower.
However, your Annual Allowance may be lower if your income exceeds certain thresholds or if you have already flexibly accessed your pension.
You can also backdate any unused Annual Allowance from the previous three tax years.
As with regular pension contributions, any contributions you make from your limited company are usually eligible for tax relief at your marginal rate of Income Tax, up to £60,000.
However, when making contributions from your limited company, the earning restrictions don’t apply. This means you may still be able to contribute up to £60,000 a year even if your personal earnings are less than that.
Many directors choose to pay much of their salary through their company dividends and reduce their salaried income, as dividends are taxed at a lower rate.
Depending on the dividend payouts, this could mean your total earnings remain the same, but your Income Tax bill is lower. And, despite having a lower salary, you would still be able to contribute up to £60,000 to your pension while benefiting from tax relief.
To qualify for this additional relief, the contributions must pass HMRC’s “wholly and exclusively” test. This test ensures that the contributions are made for the benefit of the business, such as providing a pension for the director or employee.
In practice, HMRC generally accepts pension contributions as legitimate business expenses unless they are disproportionate to the company’s profits.
The process of making pension contributions from a limited company is straightforward. You simply need to transfer the contribution to the pension provider from your company’s account and be sure to label it in your bookkeeping.
However, optimising efficiency for both you and your company while ensuring full compliance can be complex.
A financial planner can work with you to help you structure your pension contributions effectively, making sure they align with your business and personal goals.
To speak to a financial planner, get in touch.
Email [email protected] or call us on 01625 466360.
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
If you’d like more information about this article, or any other aspect of our true lifelong financial planning, we’d be happy to hear from you. Please call +44 (0)1625 466 360 or email [email protected].
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