Can My Limited Company Pay Into My Pension?
Most directors think about taking money out of their business using two main methods which are salary declarations through PAYE and dividend drawdowns.
But there’s a third option that doesn’t get talked about nearly enough, your company making employer contributions on your behalf.
It’s not just allowed, it’s actually encouraged by HMRC and when done right it can reduce your profit, save you tax and help build long term wealth at the same time.
So Can My Company Really Do That?
Yes, if you’re a director of a limited company, your business can pay employer contributions directly into your pension.
These contributions count as a tax deductible business expense, which means they reduce your corporation tax bill, provided your pension provider treats them correctly as employer contributions.
Better still, they don’t count as personal income so there’s no income tax or national insurance to pay.
It’s one of those rare scenarios in tax planning where:
- The company reduces corporation tax
- You build long term wealth without triggering tax and national insurance
- HMRC actively encourage it
Why More Directors Should Consider This
From the company’s perspective employer contributions reduce your corporation tax bill as they are fully allowable business expenses.
From a personal perspective they help build long term wealth without triggering income tax or national insurance when the payments are made. And when you retire you can usually withdraw 25% of your pension pot tax free.
Contributions are also flexible, they aren’t fixed, and you can pay in through your company whenever the business can afford to meaning they are cashflow friendly.
You are essentially building long term future wealth whilst saving tax today, in short it’s the best of both worlds.
The Caveats (Because It’s Tax)
Of course, it’s not quite as simple as putting £40,000 into a pension and calling it a day. There are a few things to consider:
- The contributions need to form part of a reasonable remuneration package (in HMRC’s eyes)
- You’ll need to stay within your annual pension allowance (usually £60,000 although it may be lower if your income is high)
- Your company needs the cash to do it and you don’t want to tie up funds you might need in the short term as you cannot access pension money until retirement
- If you’re also drawing salary and dividends, it’s important to make sure everything works together as a tax efficient blend of short term (salary and dividends) and long term accessible funds (pension contributions)
This is where an accountant really helps, we look at the full picture, talk through your goals and help you stay tax efficient whilst keeping your options open.
Final Thoughts
Employer pension contributions can be one of the most tax efficient ways to pay yourself from a limited company however they do need to be structured carefully.
They’re not right for everyone, but when they work they really work.
Still not sure if it makes sense for you?
Feel free to get in touch, we’ll talk it through and help you make an informed decision, we’ll take care of the numbers so you can focus on what you do best.
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