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The tax saving benefits of limited company pension contributions

by | Apr 12, 2022 | Personal finance

When you have your own limited company, you could get significant tax benefits through your company making contributions to your personal pension, as well as increasing your pension pot for future retirement.

Tax saving

Company contributions to a director’s personal pension scheme are classed as a business expense and are therefore deducted before calculating the corporation tax that the company has to pay based on its annual accounts.
Therefore, whatever the value of the contributions is, you will save corporation tax on this at 19%. Hence, when you pay £10,000 into a personal pension scheme and the company saves £1,900 in tax.

These contributions are allowed as a business expense for paying pension contributions and are simply another way of the director being remunerated for their services.

Government top up

In addition, there is also the possibility whereby the Government will top up your pension pot by the tax element (being 20%) as the pension provider is likely to be able to reclaim that tax element back.
So there are certainly tax-saving opportunities to be had with saving into a pension.

Annual tax allowance for pension contributions

The contributions annual allowance is the maximum threshold for annual payments to your pension schemes during a tax year and prior these contributions will be taxed.

For the tax year started 6th April 2022, the tax allowance for pension contributions is £40,000. This means that no tax is due for annual contributions made up to that amount. The Annual allowance has been £40,000 per year for the last seven years (from 6th April 2016).

If you had a pension scheme open in a prior year, you may be able to utilse allowances from the earlier years. For the year ended 5th April 2023, you may be able to utilize the allowances for the years ended 5th April 2020, 5th April 2021 and 5th April 2022, alongside the current year.

For example, if you had a pension scheme between 6th April 2019 and todays date (12th April 2022), but had not made any contributions into a scheme, you may be able to make a payment of up to £160,000. This is calculated by taking the £40,000 allowance from the years ended 5th April 2020, 5th April 2021 and 5th April 2022, plus the allowance for the current year ended 5th April 2023.

 

If you had a pension scheme between 6th April 2019 and todays date (12th April 2022), and only made contributions into a scheme of £15,000 per year (for all those years), you may be able to make a payment of up to £100,000. This is calculated by taking the £40,000 allowance from the years ended 5th April 2020, 5th April 2021 and 5th April 2022, plus the allowance for the current year ended 5th April 2023, and deducting £15,000 from each one. £160,000 – (£15,000 x 4) = £100,000.

The above are examples and we would strongly recommend that you speak with a IFA (Independent Financial Advisor) for further assistance and estimates. If you would like us to connect you with one, please get in touch.

Lifetime Allowance

The total amount of none taxable pension contributions you are able to make into your pensions schemes. There is no limit on the amount of lifetime taxable contributions you can make.

Tax Year Lifetime Allowance
2022-23 £1,073,100
2021-22 £1,073,100
2020-21 £1,073,100
2019-20 £1,055,000

Additional impact of pension contributions

You should note that pension contributions could have an impact on the company’s cashflow, so an assessment of available funds needs to be considered.
Also, as the contributions will reduce the company’s profits, the dividends available to take will decrease accordingly.

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