Can I Make Pension Contributions Through My Limited Company?
Limited companies are entitled to different kinds of tax breaks and one of them is pension contributions. That is why as a company director it only makes sense that you should take advantage of this tax break. This can also be availed by your employees if you have any.
As required by law, you only have to contribute a specific amount for your pension fund. Moreover, this is part of the auto-enrolment scheme by the government which can be availed if you are an employee of your Limited company. However, there are great reasons why you might consider contributing more than the required amount.
Should I Pay My Pension Contribution Through My Limited Company?
Do you know that paying your pension contribution is one of the most efficient ways of reducing your company’s taxable profits, which is also considered as your Corporation Tax liability? Most often, paying your contribution via your limited company is more tax-efficient compared to paying the contribution from your own funds.
Due to the complicated nature of pension schemes, it is greatly recommended that you should get expert advice from an independent financial advisor before you start paying any contributions to your own and your employee’s pension funds.
How Much Tax Can Be Saved From Pension Contributions?
The Corporation Tax rate for the 2019/20 and 2020/21 tax years is 19%. Hence, every time your company gains a profit of £100, you must pay a Corporation Tax of £19. This can lessen the amount of your company’s dividend to £81.
On the other hand, if you pay £100 for your employee’s pension fund, then the cost that your company will actually pay is only £81 since there is a decrease in your Corporation Tax payable. Gradually, this £100 investment can likely grow within the pension fund.
When Can I Withdraw My Pension Fund?
Typically, you will be allowed to withdraw from your pension fund by the time that you are already 55 years old. These funds can be used for your early retirement or as an addition to your existing income in case you are still working. It is important that you should get expert advice on this, most especially if you still want to continue working while drawing a pension.
How Much Should I Contribute To My Employee’s Pension Scheme?
You are allowed to pay as much as you want into your employee’s pension scheme provided that it conforms to HMRC’s contribution limits and rules.
Keep in mind that these contributions are tax-free provided that they are not more than the annual allowance. For 2020/21 tax year, it is capped at £40,000. Make sure that the amount of your contribution does not exceed the income of your company for that particular year since this could raise suspicions from HM Revenue and Customs as to whether this amount originated from your business or not.
If you want to place a large amount into your employee’s pension fund, then you could take advantage of the carry-forward rule. This gives you the chance to use those unused annual allowances during the previous three years, as long as the employee was a member of a registered pension scheme. When it comes to the carry-forward rule, the annual allowance intended for the present tax year should be used first. Afterwards, you can use any unused allowances from the past three years.
You should also need to consider your lifetime allowance, which is the minimum amount that you can withdraw from your pension scheme. The withdrawal can be processed either through retirement income or lump sums. Fortunately, it does not have any incurring extra tax. At present, for 2020/21 tax year, the lifetime allowance is £1,073,000, which gain an increase from £1,055,000 for 2019/20 tax year.
Again, we recommend that you should get some advice from a pensions expert, who can provide you with the proper advice during this situation.