Pension contributions are one of the few remaining tax breaks available to limited companies. It makes sense to take advantage of this tax break for you, as a company director, and your employees if you have any.
By law, you already need to contribute certain amounts into your employee’s pension fund as part of the government’s auto-enrolment arrangements. However, there are good reasons why you might want to contribute more than the minimum amount.
Making pension contributions through your limited company
Paying pension contributions is tax-efficient because you’ll reduce your company’s taxable profits and therefore your Corporation Tax liability. Making the contribution through your limited company is usually more tax-efficient than making the contribution from your own funds.
Because of the complex nature of pension schemes, we strongly recommend you take specialist advice from an independent financial advisor before making any contributions into an employee pension scheme (including your own).
Our Crunch accountants cannot provide such advice, but we have an Investments and Pensions service which can refer you to Hargreaves Lansdown, who can help you with this type of specialised financial advice – and even offer a free consultation.
How much tax can I save on pension contributions?
For the 2022/23 and the 2021/22 tax years, the Corporation Tax rate is 19%. So for every £100 your company earns as profit, you’ll pay Corporation Tax of £19, reducing the amount you can take from your company as a dividend to £81.
Paying £100 into an employee’s pension fund effectively costs the company only £81 due to the reduction in Corporation Tax payable and, over time, the £100 investment can hopefully grow within the pension fund.
When can I start withdrawing from my pension fund?
Generally, you can start withdrawing from your pension fund at the age of 55. This can be used to help you retire early or to top up your income if you are still working. Again, you should take specialist advice on this, particularly if you plan to keep working while drawing a pension.
How much can I contribute to my employee’s pension scheme?
You can pay as much into your employee’s pension scheme as you like, subject to HMRC’s contribution limits and rules.
Your contributions will be tax-free as long as they do not exceed the annual allowance, which is currently capped at £40,000 (for the 2022/23 and 2021/22 tax year). The amount that you pay must not exceed your company’s income for the year as this could raise questions from HM Revenue and Customs as to whether the amount has actually come from your company’s trading.
If you have a large amount that you would like to put into your employee pension scheme, then you may be able to take advantage of the carry forward rule. This allows you to make use of annual allowances that have not been used in the previous three years, provided that the employee was a member of a registered pension scheme. If you would like to carry forward, you must first use your full annual allowance for the current tax year before using any unused allowances from the previous three years.
You should also take into account your lifetime allowance, which is a limit on the amount that can be withdrawn from your pension scheme through either lump sums, or through retirement income, without incurring extra tax. The lifetime allowance is currently £1,073,000 in both the 2021/22 and 2022/23 tax years.
As stated earlier, you should take advice from a pensions expert, who’ll be able to properly advise you on your situation. Crunch has partnered with Hargreaves Lansdown who offer a range of financial services including individual financialice.
We’ve written a handy knowledge article about making pension contributions through your limited company.
If you want to make payments to a pension fund through your limited company, then the actual amount you contribute should be recorded. So if you contribute £40,000 into a pension fund from your company, that’s the amount you record as an expense, which reduces the amount of Corporation Tax your company pays. This should be recorded in the Crunch system as an expense under Employee Costs - Pension Scheme Contributions.