Making pension contributions through your limited company
Paying pension contributions can be tax-efficient because you’ll reduce your company’s taxable profits and therefore your Corporation Tax liability. Making the contribution through your limited company is usually more tax-efficient than making the contribution from personal funds
Pension schemes can be very complex and we therefore recommend you take advice from an independent financial advisor before making any contributions into an employee pension scheme (including your own).
How much tax can I save on pension contributions?
For the 2021/22 and the 2020/21 tax years, the Corporation Tax rate is 19%. So for every £100 your company earns as profit, you’ll pay Corporation Tax of £19, reducing the amount you can take from your company as a dividend to £81
Paying £100 into an employee's (or Directors) pension fund effectively costs the company only £81 due to the reduction in Corporation Tax payable and, over time, the £100 investment can hopefully grow within the pension fund.
When can I start withdrawing from my pension fund?
Generally, you can start withdrawing from your pension fund at the age of 55 based on current rules. This can be used to help you retire early or to top up your income if you are still working. Again, you should take specialist advice on this, particularly if you plan to keep working while drawing a pension.
How much can I contribute to my employee’s pension scheme?
You can pay as much into your employee's pension scheme as you like, subject to HMRC’s contribution limits and rules.
Your contributions will be tax-free as long as they do not exceed the annual allowance, which is currently capped at £40,000 (for the 2021/22 and 2020/21 tax years). The amount that you pay must not exceed your company’s income for the year as this could raise questions from HM Revenue and Customs as to whether the amount has actually come from your company’s trading.
If you have a large amount that you would like to put into your employee pension scheme, then you may be able to take advantage of the carry forward rule. This allows you to make use of annual allowances that have not been used in the previous three years, provided that the employee was a member of a registered pension scheme. If you would like to carry forward, you must first use your full annual allowance for the current tax year before using any unused allowances from the previous three years.
You should also take into account your lifetime allowance, which is a limit on the amount that can be withdrawn from your pension scheme through either lump sums, or through retirement income, without incurring extra tax. The lifetime allowance is currently £1,073,000 in both the 2021/22 and 2020/21 tax years.
A less well known but handy HMRC 'allowance' comes in the form of a trivial benefit.
What is a trivial benefit and how does it benefit my business?
Trivial benefits can be described as small ‘token gifts’, given by management to their employees (including to the directors). Typically these come in the form of things such as bottles of wine, chocolates, beer for the office, or team lunches. Essentially everyday expenses which keep the team motivated and morale high.
Unlike other benefits provided to employees and directors such as company cars or gym memberships, trivial benefits do not need to be reported to HMRC and there are no negative tax implications of providing these to your employees.
What conditions need to met for a benefit to qualify?
You don’t have to pay tax on a benefit for your employee if all of the following apply:
- it cost you £50 or less to provide
- it isn’t cash or a cash voucher
- it isn’t a reward for their work or performance
- it isn’t in the terms of their contract
An albeit small benefit however something useful to know when you want to keep your team happy without bothering the tax man!