As a limited company, pension contributions are one of the few remaining tax breaks you can take advantage off as a company director and your employees, if you have any.
Pension contributions are already set in law as compulsory as part of the UK government’s auto-enrolment arrangements, which you can read more of here.
However, as a limited Company Director, you may want to consider contributing more than the minimum statutory amount to reduce your tax bill.
How much can I save on my tax bill?
As a tax payer, you can contribute towards your pension from your gross salary or profit from your business if a limited company director. In other words, any pension contributions you decide to make, to the minimum legal amount or above, can be done tax efficiently. Clearly, pension contributions are a powerful tool to not only save for your retirement but being able to do so tax free.
By way of an example, as a company director of a limited company, in the current 2019/20 tax year, your corporation tax rate is 19%, which means that for every £100 you make in profit, you are due £19 in corporation tax, and your net profit is £81. If, however, you decide to contribute £100 towards your pension from your profit before tax, you are in effect only paying £81 for a £100 saving towards your retirement. Furthermore, saving for retirement into a pension plan, you would expect your retirement pot to grow.
Is there a maximum contribution limit?
All tax payers have an annual allowance which is capped at £40,000 for the current 2019/20 tax year. You can therefore save up to this amount via pension contributions tax free. The only caveat is that the amount you contribute to your pension cannot exceed your company’s income for the year.
As an employer, you also have the option to pay above the minimum threshold via your employee’s pension scheme, by using the carry forward rule. If an employee doesn’t fully utilise their annual allowance of £40,000 per year, you are able to ‘carry forward’ the employee’s previous last three years annual allowance as long as the employee was registered in the same employee pension scheme. The carry forward rules dictate that you must use the current tax year’s annual allowance before you use any unused allowance from the previous three years.
When can I access my pension pot?
The rules are clear on withdrawing funds from your pension scheme, and you can only do so from the age of 55 onwards, for both men and women. Since the pension freedoms came into force, there have been companies who claim they can help you extract funds before then, which are not legitimate.
If you do plan to withdraw funds from your pension pot when your eligible at 55 and onwards, you can take a lump sum to help you retire earlier than planned or to top up your income if you’re still working. We would highly recommend you seek specialist advice to help you plan well for your retirement.
There is a maximum amount you are allowed to extract from your pension pot without incurring a tax bill, which is known as your lifetime allowance and is set at £1,055,000 for the current 2019/20 tax year.
We can help
Southside Accountants can support you as a company director of a limited company, and can make sure you are paying the right level of tax.
Written by Shaima Todd.