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12th August 2021

It is important to consider your living standard when you retire.  Many will feel the State Pension will not be enough to meet the standard they are accustomed to.  Thankfully, we can contribute more towards that pension pot to achieve a fulfilling retirement.

Let’s explore what you can do to put money aside for the future and save tax simultaneously when you run a limited company.

Auto-enrolment (Workplace Pension)

Introduced by the Government to encourage people to save for the future, the scheme works through the employer, who sets up a pension scheme and then pays into it together with the employee through automatic deductions.

Operating a limited company, you are an employer, and as such, you need to comply with the auto-enrolment legislation. Even though owner-managed businesses are exempt from auto-enrolment, you may want to consider joining as auto-enrolment is very easy to manage; there are schemes entirely free for use and very user-friendly. To sign up, you need to be over 22, earning more than £6,240 and work in the UK.

Minimum contribution levels are the following: 3% must be paid in by the employer and 5% by the employee, which is then topped up by the Government, which adds tax relief of 1%, totalling 8% of your qualifying earnings.

Personal Contributions (Private Pension)

Basically, a savings product, personal pensions allow you to contribute regular or one-off payments. Your pension fund is usually managed by a professional money manager, who will invest your pension savings.

If you are a UK basic rate taxpayer, you get a 25% tax top-up on your pension contribution, so a £100 contribution will attract a £25 top-up from the Government. Higher and additional taxpayers can claim a further 20 or 40% through their self-assessment returns.

The maximum annual allowance for what you can pay in is £60,000 (2023/24) or 100% of your salary or whichever is lower. The allowance tapers down gradually if you are lucky enough to earn over £260K.

What are the limitations?

If your income consists of a low salary, your pension tax relief would be small. That’s because it will be based on your salary only, as dividends are not considered “relevant earnings”.

Employer Contributions

A limited company can also make pension contributions, which are tax-deductible business expenses. With contributions made directly into a private pension, the company receives corporation tax relief up to 25%, and because there is no National Insurance to pay, it adds another 13.8% (2023/24) to the saving.

The drawback is that funds would be locked until retirement age (although it is possible to access some of the funds at age 55).

Allowances and rules

The pension savings that benefit from tax relief is limited to an annual allowance. The amount, including employee and employer contributions, is £60,000 (2023/24).

For contributions to qualify for corporation tax relief, they must be paid to a registered pension scheme, provided they are paid ‘wholly and exclusively’ for the purposes of the employer’s trade or business.

How to set up

You may set up a new pension fund or use a personal pension fund already in place and make monthly contributions or lump sums at your convenience. To start making pension contributions from your limited company, you need to let the pension provider know they are employer contributions, so they process the payments correctly. The contributions need to be made directly from the business bank account – you cannot pay personally and then reimburse.

While the above guide is intended to be a general introduction to your options, we hope you have found it helpful. Before you start contributing to a pension fund, we recommend consulting with your accountant or financial advisor, who can help you decide which option best suits your circumstances.

If you have any questions or would you like to know more, feel free to contact us at 0800 917 9100 or e-mail info@myaccountant.co.uk

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