It is sometimes tax efficient for a profit-making company to set up director pension payments. They can be a valuable tax-saving mechanism, particularly for companies with profits over £50,000, which will be subject to the higher 25% corporation tax rate from 1 April 2023. As pension contributions are ordinarily a deductible expense, you can save on future corporation tax bills and save for your retirement.
Please note that Sherwin Currid cannot give financial advice and can
only advise on the tax implications of making a pension contribution.
Any pension contributions made by the company must satisfy HMRC's
"wholly and exclusively business" test. HMRC may deny the associated
claim against corporation tax if they deem it otherwise.
A company director can fund a personal pension without any need to base this on a percentage of salary and is ordinarily limited to £60,000 in the tax year which ends 5 April. There may be additional allowances if the individual has had a pension scheme open and has excess unused allowance in the last three tax years. Your company year end may not align with the 5 April, which means you can utilise two tax years in one company year.
Company pension contributions - 'Wholly and exclusively'
Contributions from a company have to be made ‘wholly and exclusively for the purpose of trade’, and HMRC might take a dim view to significant pension contributions for staff members with low salaries or minimal duties. However, this restriction does not apply to directors where there has traditionally been the freedom to remunerate as desired. In most cases, a company is likely only to want to make large pension contributions to those who are its shareholders/directors or their spouses. So if a spouse is not a director, it is recommended to make them one to provide this flexibility.
It is not possible to backdate pension contributions, which means payments must be made during the relevant company accounting period in order to obtain corporation tax relief.
Loss making companies
If your company is not making any sales, you should discuss with your account manager before making any payments. HMRC would likely disallow pension contributions if the company is not trading.
Personal pension contributions
Please be aware that if you are making personal pension contributions from your own bank account, you will only be able to obtain tax relief on pension contributions up to the level of your PAYE earnings. Most sources of income - such as dividends, interest and property income - do not count as earnings for pension purposes. This generally leaves employment income, which tends to be relatively low for limited company director-shareholders for their tax efficiency.
We strongly recommend that you discuss your options with your pension provider or a financial advisor. We can introduce you to a financial advisor for a free consultation, please contact your account manager for details.
High-income earners & allowance tapering
Please note that you may be subject to the allowance tapering rules if you are a high-income earner with income and pension contributions over £200,000.
Threshold income and adjusted income
Threshold income is usually your net salary, other income like dividends, interest, property income, and your salary sacrifice pension from your employment. If your threshold income is below £200,000 you have the full annual allowance. If it isn't below £200,000, then we then look at adjusted income.
Adjusted income is usually your net salary, other income like dividends, interest, property income plus your salary sacrifice pension AND your employers' contributions from your employment. You have the full allowance if your threshold income is below £260,000.
If your income exceeds these thresholds, the annual allowance of £60,000 may be tapered by £1 for every £2 over, with a floor of £10,000. Any excess contributions not covered by brought-forward allowances will be taxed at your marginal tax rate in your self-assessment tax return.
Brought forward allowances
If you have had a pension scheme open in the three previous tax years and have not used up all your allowances for those years, you may be able to use up these and avoid paying the tax charge.
We can assist on a chargeable basis with the calculations on your brought forward allowances and any tapering, please contact your account manager for details.