A Guide to Making Pension Contributions Through a Limited Company

Limited companies seeking to make use of legal tax breaks could benefit from making pension contributions for company directors and employees.

The law already dictates that certain contributions must be made into qualifying employees’ pension funds under the auto-enrolment system. However, it could be wise to consider contributing more than the minimum required.

Tax breaks through pension contributions

Paying pension contributions through a limited company is tax-efficient as it reduces the taxable profits and therefore your Corporation Tax liability. If you already make personal contributions into a pension, and you own a limited company, it will usually benefit you to make the contributions through the company.

The current rate of Corporation Tax is 19 per cent, which means for every £100 you pay per month into a pension scheme, it would actually only cost your company £81.

Pension scheme contributions

You can pay whatever amount you wish into an employee pension scheme, providing you remain with the limits set by HMRC.

All contributions remain tax free, providing they do not exceed the annual allowance. This is currently capped at £40,000. The amount paid into a pension scheme must not be more than the company’s annual income, otherwise it may result in HMRC enquiring as to whether the contribution has actually come from the company’s trading.

Lump sum investments

Should you have a large sum that you would like to consider investing into your pension scheme then it may be worth exploring the ‘carry forward’ rule.

The carry forward rule makes it possible to utilise annual allowances that have not been used over the previous three years. As long as you or the employee wishing to invest the lump sum has been a member of a registered pension scheme, and you use your full annual allowance for the current tax year, then you can go ahead and utilise any unused allowances from the previous three years.

There is also a lifetime allowance to take into consideration. For this current tax year, there is a limit of £1,055,000 that can be withdrawn from a pension scheme either through lump sums or via a regular income, without a tax liability being applied.

Pensions advice

The importance of taking independent financial advice from a qualified pensions specialist cannot be over-emphasised. No decisions should be taken without such advice, as your future retirement income could be at risk.

The Pensions Advisory Service (TPAS) offers free, impartial information and guidance to the public on all aspects of pensions including on workplace, personal and stakeholder schemes, as well as the State Pension. Its aim is to make pensions accessible and understandable for everyone and it is an excellent first port of call for all pension related enquiries.

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