Blog>Trade>Finance>Limited company director pensions: What you need to know
Last updated: 19 March 2024
Limited company director pensions: What you need to know
Company pension contributions for directors are a tax-efficient way to save for retirement. In this article, we look at how they work and how to set them up.
A common challenge for many tradespeople is finding time to think about retirement plans. With pensions, the earlier you start paying in the more you should get out of it.
Tax reliefs are available on pension payments to help the amount grow. If you are a company owner and director you could benefit twice from tax relief.
First, there’s individual tax relief on your pension. Second, company pension contributions for directors can reduce the corporation tax bill as they are tax-deductible expenses.
Business owners have plenty of choices on pensions. You’ll need to weigh up the advantages of the company making pension contributions for directors. Depending on your circumstances, a directors pension scheme could be worth pursuing.
Setting up a directors pension scheme
If you already have a private pension your company can also probably make contributions to it. If you don’t have a pension you can look for one that suits you.
There are pension providers who specialise in smaller businesses. They should offer advice and support for your current and future plans.
Most pension providers operate online and have handy mobile apps. It's worth looking for a pension provider that makes it easy for you to monitor your pension.
Choosing a directors pension scheme
To obtain tax relief on contributions, a pension has to meet certain HMRC criteria. The pension has to be registered with HMRC for tax relief. It also has to meet HMRC rules for investing your money.
For example, to qualify for tax relief, a pension scheme must provide benefits in at least one of these circumstances:
Retirement
Reaching a particular age
Incapacity or serious ill health
When you pass away
Remember, if your company has employees you need to have a workplace pension scheme.
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Tax benefits of company pension contributions for directors
The main tax advantages of setting up a company pension scheme for directors relate to both corporation tax and National Insurance.
Corporation tax
Pension contributions are an allowable business expense. That means they can be deducted from company profits so it pays less corporation tax. Corporation tax rates changed from 1 April 2023 and are currently 19% for taxable profits under £50,000.
National Insurance
Unlike salaries paid to directors, companies don’t have to pay National Insurance (NI) on pension contributions. Your company could save NI on your salary if, instead, the money went into your pension pot.
Make sure directors pension scheme contributions are allowable for tax relief
Only trade-related amounts of the pension contribution are tax deductible. They have to be ‘wholly and exclusively’ related to running the business. HMRC could decide the pension contribution is excessive for the value of work a director does for the company.
Another important point is that a company should have enough money to pay its corporation tax bill. You’ll need to keep a close eye on how much is paid to the director’s pensions and in dividends.
How much you can put into a company pension scheme for directors
A company can pay as much as it wants into a directors pension scheme. But whatever a company pays counts towards the director’s annual tax-free pension allowance limit.
The allowance is the lower of two amounts. Either £60,000 in any one tax year (to 5 April) or 100% of the director's salary. If more is paid into your pension, you’ll probably have to pay income tax on the extra amount.
If some of your allowance is left over one year, you can carry it forward to the next. You can bring forward unused allowances from the previous three tax years.
Pension, salary or dividend?
As a company director, you’ll need to think carefully about how much income comes from salary, pension and dividends.
If your company pays you dividends they don’t count as salary. This could have an impact on your annual pension allowance.
How you mix income types could affect how much tax needs to be paid. Both by you and by your company.
FAQs
What is a directors pension scheme?
It is how a limited company contributes to a director’s retirement pot. The director can personally pay into the scheme along with the company’s contribution.
What about a limited company setting up a company pension scheme for directors?
A limited company can pay into the director’s existing private pension. Alternatively, select a pension provider to set one up – many specialise in helping smaller businesses.
What contributions can companies make to a director’s pension?
A limited company can pay as much as it wants into a director’s pension. However, there is an annual tax-free personal pension allowance. Any payments above this could be liable for income tax.
Can a company reduce its corporation tax bill with a directors pension scheme?
Yes. A director’s pension is an allowable business expense that can reduce the company’s profits. This would reduce the amount of corporation tax it pays.
Should my company pay me dividends, a pension or both?
It depends on your overall income. To receive dividends you have to be a shareholder in the company. Dividends don’t count as part of your salary, which could affect how much of your tax-free annual pension allowance you use.
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