Pension contributions in the UK form a crucial financial cushion for limited company directors, ensuring they have financial stability after retirement. Company directors can make pension contributions personally and directly through a limited company. The UK government encourages retirement savings by offering tax reliefs on director pension contributions, increasing the savings for the future, and reducing their tax liabilities.
This blog explains how tax relief works for both personal and company-paid pension contributions for directors of limited companies.
What Are Directors’ Pension Contributions in the UK?
Director pension contributions in the UK refer to funds that a limited company pays into a director’s retirement savings plan, commonly known as a private pension. Notably, as a director, you can make contributions to your pension pot from your own post-tax income, dividends, or directly from the company’s profits, which is a more tax-efficient option. Notably, personal contributions are eligible for income tax relief (not available for dividends) at the individual’s marginal tax rate. Furthermore, limited company contributions are considered a business expense, which reduces the company’s taxable profit. As a result, it reduces the amount of corporation tax your company has to pay.
Do you know how much pension contributions can a limited company director contribute in a single tax year and whether a limited company can contribute to a director’s pension pot? Read the following guide to get the answers:
What Are The Tax Reliefs available on Personal Director Pension Contributions?
By making personal pension contributions, you can get tax relief in the form of individual income tax relief. For instance, you will contribute net of the basic rate of tax. Let’s understand how:
- When you make personal pension contributions, your pension provider claims tax relief from the government at the basic 20% rate and contributes it to your pension pot. For instance, your annual director’s net salary is £14,570. The maximum amount you can contribute to your pension pot in the current year and claim tax relief is £14,570. Aside from that, the government will add £2,914, a 20% tax relief bonus, making your total pension contribution £17,484.
- It is known as relief at source, and it is equal to the basic 20% rate of Income Tax. Notably, the basic rate is the Income Tax amount that you have already paid on your earnings through the PAYE system.
- Similarly, suppose you are a higher-rate (40%) taxpayer from Wales, England, and Northern Ireland. In that case, you can personally claim additional tax relief of 20% when filing the self-assessment tax return, meaning a total of 40% relief can be claimed.
- Likewise, the additional rate (45%) taxpayers can claim an extra 25% (total 45%) relief on their self-assessment tax return.
- After the government accepts your self-assessment claim, you will get the tax back as a refund once your self-assessment is completed. The government uses the relief to encourage people to save for retirement.
A director can get tax relief on their contributions based on how much their salary is and the tax band they fall in. The rules around payment to and from directors can raise numerous tax implications, and the rules can get complex, such as when extracting money as a director’s loan or complex bonus payments. Understanding these rules can help select the most tax-efficient approach for extracting money from a company or adopting a tax-efficient remuneration strategy. You can learn more about directors’ loans by referring to the following guide:
For more information on income tax rates and personal allowances, visit the government website.
Understanding The Tax Relief Of Limited Company Pension Contributions
When your company contributes to your fund, it receives corporation tax relief on directors’ pension contributions.
To your relief, HMRC categorises pension contributions as allowable or tax-deductible business expenses, provided the contributions are ‘wholly and exclusively’ for the profession, trade, or vocation purposes.
Now, when you contribute to a pension through your limited company, it will come within the allowable expense category. You can deduct those pension payments from your company’s profits and trim down your company’s Corporation Tax liability. You can provide your company with a tax relief of 19% to 25% based on its level of annual profits.
In contrast to the personal pension contributions from your salary, employer only contributions through your limited company are not subject to income tax or NI. the National Insurance rate for the 2025/26 tax year is 15%. Therefore, if your employer contributes to your director’s pension pot rather than making personal payments as a salary, you can viably save the 15% NI amount.
It is relevant to add here that when your limited company makes pension contributions to your fund, it not only brings valuable tax relief but also falls in line with your wider duties as a director. Speaking of duties, it is crucial to carry out your responsibilities as a managing agent of the company to ensure it meets all the statutory obligations. Are you fully aware of what your responsibilities are as a director? If not, read the following guide to explore your duties:
What is the maximum pension contribution for a limited company director?
Fortunately, there is no maximum percentage, amount, or limit to a director’s pension contribution in the UK because you can contribute as much as you like into the private pension. Nonetheless, there are specific thresholds that limit the amount of tax relief you can claim on these pension contributions, such as:
Annual Allowance
Private pensions are limited to an annual allowance of £60,000, or 100% of your gross PAYE salary earnings, whichever is lower.
Subsequently, £60,000 is the maximum amount you can add to your pension in a tax year before paying your tax.
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Lump Sum Allowance
To replace the lifetime allowance, the government introduced an individual lump sum allowance and a lump sum and death benefit allowance, which took effect on 6 April 2024. Notably, these allowances lower the amount of tax-free benefits available from your pension schemes.
To clarify, you can withdraw a tax-free lump sum of up to 25% of the amount in your funds. In contrast, the individual allowance allows you to receive a maximum of £268,275. However, this amount can be higher, given that you hold a protected allowance.
You can refer to the government website to learn more about rates of director pension contributions:
Lump Sum And Death Benefit Allowance
Similarly, with lump sum and death benefit allowance, you can take up to a tax-free lump sum of up to £1,073,100. However, it is only allowed under certain scenarios, such as when you need to take a lump sum due to severe illness or when your beneficiaries receive specific lump sum death benefits.
Whenever your lump sum amount exceeds the allowances mentioned above, the excess amount will be subject to Income Tax payment. As a result, your pension provider must deduct the amount before contributing it to your fund.
Bottom Line
All in all, knowing tax relief on director’s pension contributions is crucial since it not only maximises the savings in the pension pot but also minimises the tax bill for directors. For limited company owners, having a sound command of pension planning is not the only facet they must consider. Instead, from company formation to fulfilling tax and payroll obligations, there is a lot on a company director’s plate.
Clear House Accountants in the UK can be your partner who can help you manage your stress when dealing with the complications of managing your limited company. Our team comprises skilled certified accountants who can help, whether you want to set up a limited company, need help with finance director recruitment, company shares, business support services, or comprehensive payroll solutions. With our support, directors can direct their focus on growing their businesses while knowing their financial future is in safe and expert hands. Contact us today!
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