Can my Limited Company contribute to my pension?

By Published On: 7 December 2021

When you’re busy contracting you’ll want to know that your future is taking care of, usually in the form of a pension. But can your Limited Company contribute to your personal pension?

In this blog we explore just that, to help you plan for your future.

Your Limited Company and your pension

By contributing to your pension from your Limited Company, you can enjoy significant tax advantages, as they’re considered an allowable expense, and can therefore be offset against your Corporation Tax bill.

As a Limited Company, you’re able to make payments in two ways:

  1. By making personal contributions
  2. By making contributions through your Limited Company

Both payment options have their own tax advantages, and which one you choose will be based on your own personal circumstances.

The tax implications from making personal pension contributions

When you make a payment into your pension, you receive tax relief which reflects the rate of income tax you pay. So in a nutshell, if you are a basic rate taxpayer, you’ll pay £100 to save £125 into your personal pension.

Whilst the total amount you can pay into your pension is limitless, there is a limit to the amount you can contribute and still receive tax relief. At present, the limit is 100% of your income, up to the maximum of £40,000.

If annually you earn less than £3,600 or nothing at all, the total amount you’re able to contribute to your pension (within the tax relief limit) is £3,600, including government tax relief.

The tax implications from making personal pension contributions as the director of your Limited Company

As a Limited Company contractor you’re bound to take a mixture of a salary and dividends, which is great for minimising your tax liabilities and maximising your take home pay, but not so great when it comes to your pension, as dividends are not classed as ‘relevant UK earnings’. So this means that the amount you take as salary (which is probably a small amount due to the tax implications) is what will be used to calculate your pension tax relief limit, and if you were to exceed your limit, you’ll face tax implications from HMRC.

So in order to increase the amount you’re able to pay into your pension you can either increase your salary payments, or make the pension contribution straight from your company, which is classed as an employer contribution.

Employer pension contributions

Your Limited Company is able to make pre-taxed company contributions into your pension. Employer contributions count as allowable expenses, so your company receives tax relief against Corporation Tax, so effectively your company could save a maximum of 25% in Corporation Tax.

In order for your pension contributions to be acceptable, they must abide by the allowable deductions. Pension contributions must be ‘wholly and exclusively’ for the purpose of business, and HMRC police this by looking for certain evidence, (eg whether other employees of your Limited Company are receiving comparable remuneration packages).

Another benefit that’s available to you by making employer pension contributions directly from your Limited Company, is that employers aren’t subject to National Insurance on pension payments. So if you were to contribute directly into your pension rather than paying in the form of a salary, you’d save up to the current National Insurance rate for 2021/22, which is 13.8%.

So theoretically by paying directly into your pension (rather than paying money in the form of a salary), your Limited Company can save up to a total of 38.8%. Your personal circumstances of course will have an effect on how beneficial this is to you, and it may be the case that paying personal pension contributions will actually mean you have more money in your pension pot at the end of the day.

How Aardvark Accounting can help

Pensions can be confusing, and when you’re busy contracting you’ll want to make sure that your money is working as hard as it possibly can in the background, so that it’s ready for when you decide to retire. Your Aardvark accountant will be able to advise you further on this, and point you in the right direction for specialist pension advice and support that’s tailored to your specific needs. Another great benefit of being an Aardvark Accounting client! Get in touch directly with your Aardvark accountant to discuss your plans for the future, and how they can help you achieve your goals.

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