If your Ltd company is enjoying a strong profit and cash performance, then maximising your pension investments may be an appealing consideration. These would be classed as employer contributions and are an allowable business expenses, reducing your corporation tax liability.
The limit is dictated by your personal individual annual allowance, which is currently £60k per tax year (this increased on April 6th 2023). If you have made no personal contributions, nor received contributions from other sources, then £60k is the maximum you could invest from your Ltd company each year. As Corporation Tax is currently 25% for businesses with greater than £250k profits, this could mean up to £15k Corporation Tax relief. Alternatively, this means a £60k pension investment really only costs £45k.
Employers do not have to pay national insurance on pension contributions. Therefore, even if £60k is not viable, contributing an amount directly into a pension rather than remunerating through a salary, could save up to 13.8% in national insurance, when comparing it to a salary alternative.
As with a lot of business expenses, HMRC dictates that pension contributions must pass the “wholly and exclusively” test for the employer’s trade. Is the total level of remuneration (salary, dividends, benefits-in-kind, pension contributions) “commercially reasonable” for the work being done? If you’re the sole director and the main generator of the company’s income however, it’s difficult to see how you would fail this test.
Another factor to consider is of course your company profits and ensuring pension contributions aren’t greater than the profits available. Equally, ensure that staff who are doing similar work are receiving similar pension contributions.
The above focuses on employer’s contributions. This is because if you run your own business, contributing to your own pension scheme directly from your wages won’t be more tax-efficient in most instances. Equally, personal pension contributions are limited to 100% of your PAYE earnings, or the £60k annual allowance, whichever is lower. Most small business owners pay themselves a nominal salary, so utilising your annual allowance via employer contributions makes more financial sense, and can achieve greater savings when considering the business and individual combined.
Finally, the pension carry forward-rule may also be worth considering. Carry forward allows you to take advantage of unused pension allowance from the previous three tax years. So, if in the prior three tax years no pension contributions have occurred, you could in theory invest £180k in the 23/24 tax year. This is comprised of the £60k annual allowance in 23/24, and three lots of £40k from the three prior tax years when the annual allowance was lower. As well as not utilising the annual allowances, the other stipulation is you have to have been a member of a pension scheme during those years, even if you didn’t make any contributions during that time.
This article is designed as a brief introduction to the topic and everyone’s situation is always unique. If you have any questions or would like some advice on your own situation, please submit a message on the contact page and I will be happy to help.
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