When you have your own limited company, you can get significant tax benefits through your company making contributions into your personal pension, as well as increasing your pension pot for future retirement.
Company contributions into a director’s personal pension scheme is 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 are, you will save corporation tax on this at 20%. So pay £10,000 into a personal pension scheme and the company saves £2,000 in tax.
The contributions are allowed as a business expense as paying pension contributions are simply another way of the director being remunerated for their services.
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.
The only individuals who have restrictions on the amount that a company can pay into a personal pension are those who are in the very high earning band. For everyone else, the company can pay contributions of up to £40,000 (for 2014/15).
There is the impact which the contributions will have on cash flow for the company, so an assessment on available funds needs to be considered.
Also, as the contributions will reduce the company’s profits, the dividends available to take will decrease accordingly.