Things You Should About Employer Pension Contributions

If you own a limited company, it is an advantageous idea to make contributions to a pension. This will help you to bring tax benefits as it will allow being treated as allowable expenses in your business and will benefit you at the time of your corporation tax bill. It is possible even if you carry out your own business of any sort. It is your choice if you want to make personal contributions to a pension or you can make employer pension contributions through your company as well.

For easy execution, you need to have a plan that will help to make an easy contribution be it personal or through your company. You will get tax benefits in both ways. To find out the right choice for yourself, you need to have a clear analysis of your business circumstances. However, here in this article, we will discuss tax implications for both options. This includes the following:

• Personal Pension Contribution
• Employer Pension Contribution through the Limited Company
• The Bottom Line

Personal Pension Contribution:

When you make personal pension contributions, you receive tax relief based on your tax rate.

• • Basic Rate Taxpayer (20%): For every £80 you contribute, the government adds £20, making your total contribution £100. This means for every £100 you put into your pension, it only costs you £80.
  • Higher Rate Taxpayer (40%): If you pay tax at 40%, for every £60 you contribute, the government will add £40, making your total contribution £100.
  • Additional Rate Taxpayer (45%): For every £55 you contribute, the government adds £45, bringing your total contribution to £100.

Contribution Limits:

• Annual Contribution Limit: You can contribute up to 100% of your earnings or a maximum of £40,000 per tax year (whichever is lower). This is the annual pension annual allowance.
  • If your income exceeds £240,000, there may be tapered annual allowances, which could reduce the £40,000 limit.
• For those earning less than £3,600: If you earn under £3,600, you can still contribute up to £3,600 into your pension, and you will receive tax relief on that contribution.

Personal Pension Contribution as Director:

If you own a limited company and as a director, you are getting the salary and the dividends. The case of contribution to pensions will be different. Since the dividends are not taken as your UK earnings your pension tax relief limit will depend on the amount of your salary only.

Some of the directors who are making low income and taking a good amount of dividends should not try to exceed the pension limit, this can result in extra tax charges.

To enjoy the most out of pension contributions, a director with a low income can struggle to increase salary or make contributions through the company. This is possible as an employer contribution.

Employer Pension Contribution through the Limited Company:

As mentioned above the option is open to making pension contributions straight through your company. We consider employer contribution as an allowable expense of business. The company will receive corporation tax relief. So in this way, the company will receive 25% of the savings on the amount of contribution.

Allowable rules must be followed in order to make the contribution a seamless working. By the rules, we understand that the contributions should be made with the intention of business growth. In order to prove this to HMRC, solid shreds of evidence are asked as well.

Moreover, the employer is getting the benefit of not paying the national insurance. the current rate is 13.8%. So this is another way to increase your savings by 13.8%.

The Bottom Line:

Now that you have developed a better understanding of employer pension contribution and personal pension contribution, we can sum up the discussion by saying that if you own a limited company, as a director the best option is to pay straight through the company to get the most benefit out of of the pension contribution.

Disclaimer: This article intends to provide general information based on employer pension contributions.