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How Much Can a Company Put Into a Director’s Pension?
Even if retirement feels like a distant horizon, setting up a pension and planning for your eventual exit from the business is always a smart move. The earlier you start, the more money you’ll have saved up, and smoother the transition will be.
As a company director, you have the option to boost your personal pension with contributions from your company. This comes with benefits for both you and the business. But what are the limits on these contributions? And what should you know before diving in? That’s exactly what we’ll explore today.
The financial advisers at Lester Brunt are veterans in helping company directors navigate their pensions. We understand the ins and outs, and below, we’ll break down the details of company contributions, including the maximum tax-free amount your company can contribute.
How Do Company Pension Contributions Work for Directors?
Directors of limited companies don’t receive the same workplace pension plans as regular employees. Instead, they typically set up their own private pension (like a stakeholder pension or a Self-Invested Personal Pension). Their limited company can contribute to this pension before they retire, saving them money on taxes.
What Are the Advantages of Company Pension Contributions?
Pension contributions can be a win-win for both you and your company. Here’s how:
- The company gets to reduce its taxable profits by the amount they contribute to your pension. This lowers their corporation tax bill, typically between 19% to 25% depending on the company’s profit level.
- Unlike salary, company contributions to your pension aren’t subject to National Insurance. The current National Insurance rate is 13.8%, so the company saves on that cost as well.
- Company contributions avoid income tax and dividend tax that would typically apply if you received the money as salary. This allows you to save more money for retirement compared to taking a higher salary.
Are There Limits to Company Pension Contributions?
As contributions aren’t tied to your salary, there’s no strict limit on how much the company can pay into your pension. However, there are some restrictions and regulations you should be aware of:
Annual Allowance
This is the maximum amount that can be contributed each year and still get tax relief. The current limit is £60,000 (for the 2023/24 tax year onwards). Any excess will be taxed. This applies to both the contributions made by your company and your own personal contributions.
If you have unused allowances from previous tax years, you might be able to carry them forward and contribute more than the current year’s allowance.
HMRC Rules
Contributions must comply with HMRC’s “wholly and exclusively” for business purposes test. In simpler terms, this means the contributions have to be a normal and fair amount for your company size, industry, and your position as a director.
Lester Brunt: Your Partner in Smart Financial Planning
Pension plans can be a maze, but they shouldn’t hold you back. At Lester Brunt, we help business owners navigate the complexities with confidence.
Our team of experts have over 25 years of experience advising on pension plans for both directors and employees. We work closely with you to find a solution that maximises your tax savings and keeps your company on solid financial ground, so you can have total peace of mind in your financial security. We can also guide you through all aspects of corporate planning, from building a strong investment portfolio to designing a smooth exit strategy.
With over 4,500 satisfied clients across the South of the UK, we have a proven track record of guiding companies towards a bright future. Book a no-obligation consultation online or call us on 01202 695 801 to get started!
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
Exit Strategies may include the referral to a service that is separate and distinct to those offered by St. James’s Place.
Written By Sam Wade
Financial Adviser
Lester Brunt Wealth Management
Lester Brunt Wealth Management is a trading name of Lester Brunt Wealth Management Ltd
SJP Approved 22/07/2024