Company pension contributions – how to save tax

Company pension contributions – how to save tax

If you’re a business owner, you can save tax by making company pension contributions. Employer pension contributions are treated as an allowance expense, reducing your company’s corporation tax bill.

What are the benefits of making pension contributions from my business?

Making pension contributions from your business into a pension has 3 major tax-saving benefits:

1. HMRC treats company pension contributions allowable business expense, reducing your company’s corporation tax bill
2. You pay no income tax on the contribution, unlike additional salary or dividends
3. Your pension can grow tax-free.

Making a contribution through your limited company is usually more tax-efficient than making the contribution from your own funds.

Due to the complex nature of pension schemes, we strongly recommend taking specialist advice from an independent financial advisor.

How much tax can I save by making company pension contributions?

For every £1,000 contributed to a pension, you can save up to £463 in tax.

As a business, you pay corporation tax on any profits made. The current rate of corporation tax is between 19% and 25%, depending on your profits.

Imagine that at the end of the year, the business has profits of £1,000, and your corporation tax rate is 19%. From this, £190 will be deducted in corporation tax, leaving you with £810.

You decide to take this £810 as a dividend. Dividend taxes will be payable on top. Depending on your rate of tax, this will be 8.75% (basic rate), 33.75% (higher rate) or 39.35% (additional rate).

Assuming that you’re a higher rate taxpayer, you will pay £273 of dividend tax (£810 x 33.75%), leaving you with just £537.

So for £1,000 of profit, you receive £537. That’s an equivalent tax rate of 46.3%.

Compare this to putting the same £1,000 profit into a pension. Pension contributions can be treated as an allowable business expense, which works to reduce your profit. In this scenario, you would pay no tax.

Summary: By making a pension contribution of £1,000, you can save £463 in tax.

N.b. An additional benefit is that employers don’t have to pay national insurance contributions on pension contributions. The national insurance rate for 2023/24 is 13.8%, so by contributing directly to your pension rather than paying the equivalent in salary, you can save an additional 13.8%. This hasn’t been included as most company directors take the majority of their income via dividends.

How much can my business pay into my pension?

In brief, you can pay £40,000 per year into your pension, subject to HMRC’s contribution limits and rules. These classify as ‘employer pension contributions’, as the company is paying into the pension scheme.

Your contributions are tax-free as long as they do not exceed the annual allowance, which is currently capped at £60,000 (2023/24 tax year). The amount that you pay must not exceed your company’s income for the year as this could raise questions from HMRC as to whether the amount has actually come from your company’s trading.

Summary: the business can pay up to £60,000 per year into a pension.

Can my business pay more than £60,000?

Yes. Technically, the business can pay up to £160,000 into a pension. It does that by making use of ‘carry forward’.

When paying into a pension, you are entitled to an allowance of £60,000 per year (prior to 2023/24 it was £40,000 per year). However, if you have unused allowances from previous years, this can be carried forward for up to three years. In effect, you can use the current years’ allowance of £60,000 and the three previous years allowances of £40,000 each (£40,000 x 3 + £60,000 x 1 = £180,000).

If you have a large amount that you would like to put into your pension scheme, then you could put up to £160,000 in, using the ‘carry-forward’ rule.

If you’re thinking about using ‘carry-forward’ to make a large contribution, you must use your current annual allowance first, then look at any unused allowances from the previous three years.

You will also need to have a registered pension scheme for each of the previous years you use, although don’t necessarily need to have been contributing into it.

The other limit to be aware of is the Lifetime Allowance. This is the maximum amount that your pension can be worth before tax charges apply. For more information, see this article on the lifetime allowance.

Summary: the business can pay up to £180,000 into a pension.

When can I access my pension?

You can access your pension from age 55, although this is increasing to age 57 from 2027.

For more information on how to access your pension, see this article on retirement planning.

Initial consultation 

If you’re looking for independent advice around business pension contributions, we can talk.

Feel free to go ahead and schedule an initial consultation with one of our experienced advisers.

All the best,

James Mackay, Independent Financial Adviser in Bristol

P.s make sure to download your free guide to employer pension contributions for company directors.

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Financial Advisor Bristol and Pension Advisor Clifton

Frazer James Financial Advisers is an Independent Financial Advisor based in Clifton, Bristol.

About us: Frazer James Financial Advisers is a financial advisor, based in Clifton, Bristol. As an independent financial adviser, we’re able to provide independent and unbiased financial advice. We provide independent financial advice, pension advice, investment advice, inheritance tax planning and insurance advice.

If you would like to speak to a Financial Advisor, we offer an Initial Financial Consultation without cost or commitment. Meetings are held either at our offices, by video or by telephone. Our telephone number is 0117 990 2602.

Frazer James Financial Advisers is located at Square Works, 17 – 18 Berkeley Square, Bristol, BS8 1HB.

This article provides information about investing, but not personal advice. If you’re not sure which investments are right for you, please request advice.

Remember that investments can go up and down in value, you may get back less than you put in.