Why you should be using your limited company to contribute to your pension


If you are a business owner, the concept of planning for the future should be a familiar one. Just as you invest in your business to make sure it can meet future challenges, you need to invest for your retirement, ensuring you have enough money to live out your life in the way to which you are accustomed.

A pension is both the traditional means of accomplishing this goal and a useful tool with which to minimise your tax burden. If you own a limited company, you can use it to contribute to your pension. This is a step that all limited company owners should consider, as it comes with its own particular benefits.

As a director of a limited company, the most tax-efficient way to earn a living is by paying yourself a small salary and taking dividends. But this causes a problem when making direct payments into your pension, as the amount you can contribute annually is calculated from your salary (dividends don’t count as “relevant UK earnings” in regards to pension contributions). In other words, taking a small salary might work in your favour when it comes to the income tax you’re paying, but it will work against you when making tax-free pension contributions.

Since you almost certainly don’t want to increase your salary, another alternative is to make contributions to your pension directly from your limited company. These are then classed as “employer contributions” because they are not coming from you as a private person – they are coming from your company, which employs you as a director.

This move comes with two additional benefits. First, contributions from your company into your pension are classed as “allowable expenses” meaning you can claim relief for them from Corporation Tax (up to a maximum of 25%). Second, employers are not subject to National Insurance (NI) on pension contributions, meaning you could save the NI rate on any contributions you make (currently 13.8%).

There are no downsides to making contributions into your pension from your limited company. However, depending on your personal circumstances, it is possible that you would be better off making personal contributions instead. For this reason, and also because contributing to your pension in the way set out above requires an understanding of HMRC’s regulations over allowable deductions, we urge all limited company owners to contact us on 0121 456 0190 if they want to take advantage of this potentially lucrative route to a happier, more secure, retirement. Our friendly and professional staff will ensure that you’re acting in your own best interests and not falling foul of any relevant guidelines.

Get in touch

JW Hinks LLP
19 Highfield Road, Edgbaston,
Birmingham B15 3BH

Phone: +44 (0) 121 456 0190
Fax: +44 (0) 121 456 0191
Email: info@jwhinks.co.uk