There are significant tax advantages to be had when contributing to a pension through a limited company. If you run your own business and it’s incorporated as a limited company, you can make personal contributions to a pension or you can make contributions through your company.
If you have a PensionBee plan, you can easily set up personal or company pension contributions.
Both options bring tax advantages, and what’s right for you will depend on your individual circumstances, but here’s a summary of some of the tax implications for each option.
Making personal pension contributions
When you pay money into your pension, you receive tax relief that reflects the rate of income tax you pay. This means that, as a basic rate taxpayer, you effectively only pay £100 to save £125 into your pension.
Although there’s no limit to the amount you can pay into your personal, self-employed or contractor pension, there are limits to the amount you can contribute and still receive tax relief. The limit is currently 100% of your income, up to a maximum of £60,000.
If you earn less than £3,600 annually or don’t earn anything, the maximum amount you can contribute to your pension within the tax relief limit is £3,600 (including government tax relief).
Making personal pension contributions as the director of a limited company
Is my company pension taxable?
If you own a limited company and you take both salary and dividends, the dividends don’t count as ‘relevant UK earnings’. Only the amount of money you take as income will be used to calculate your pension tax relief limit.
If you take a small salary and a large dividend from your company, your pension tax relief limit will be low. If you exceed your limit, you’ll face tax charges.
If you want to increase the amount of money you can pay into your pension and still enjoy tax relief, you can either:
- increase your salary
- make the pension contribution straight from your company as an employer contribution
There are other benefits to doing things this way too, as we’ll explain below. There is the option to sign up for a self-employed pension with PensionBee.
Making employer pension contributions directly from your limited company
Your limited company can contribute pre-taxed company income to your pension. Because an employer contribution counts as an allowable company pension scheme business expense, your company receives tax relief against corporation tax, so the company could save up to 25% in corporation tax.
Your employer pension contributions must abide by company pension rules for allowable deductions. The rules state that the pension contributions should be ‘wholly and exclusively’ for the purposes of business. To figure out whether this is the case, HMRC looks for certain evidence - whether other employees are receiving comparable remuneration packages, for example.
Another benefit is that employers don’t have to pay National Insurance on pension contributions. The National Insurance rate for 2023/24 is 13.80%, so by contributing directly into your pension rather than paying the equivalent in salary, you save up to 13.80%.
In total, your company can save up to 38.85% by paying money directly into your pension rather than paying money in the form of a salary. Depending on your circumstances, this may or may not be more beneficial to you than paying personal pension contributions.
Making employer contributions into your PensionBee pension
If you’re the director of a company and you have a PensionBee pension, you can set up a company pension and make employer contributions into your pension as well as personal contributions. Just select the contributions tab in your BeeHive.
If you don’t have a PensionBee pension yet, you can learn more about what makes us different.
Benefits of using PensionBee to manage your self-employed pension
PensionBee’s pension plans are personal pensions that are open to employed or self-employed people. Like all personal pensions, they’re defined contribution pensions, which means the amount you have when you retire depends on the amount paid in and the performance of your investments.
PensionBee’s pensions for the self-employed have some great benefits:
- they can be managed online or using the secure PensionBee app
- you can set up regular contributions or add one-off payments
- there’s just one all-in annual fee
If you’ve never saved into a pension before, you can start one with PensionBee without having an existing pension.
Please note that tax rules change regularly, and the actual tax benefits you receive will depend on your individual circumstances. If you’re not sure, please seek professional advice. As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest.
Last edited: 01-09-2023