Paying into a Pension as a UK Company Director

1. Personal Pension Contributions

As a director, you can make personal pension contributions and claim tax relief on these. Contributions to your pension are deducted from your taxable income, which means you’ll pay less tax overall. The current tax relief on pension contributions is up to the annual allowance limit, which stands at £60,000 for most individuals (for the 2024/25 tax year).

If you are a higher-rate taxpayer, you can claim back additional tax relief through your self-assessment tax return, further boosting your retirement savings. The pension provider will typically claim basic rate tax relief (20%) on your behalf, and you can claim the additional relief through your tax return.

2. Employer Contributions (Through Your Company)

An often-overlooked option for company directors is making pension contributions through your company. These contributions are paid directly into your pension scheme by your business and are treated as a business expense. As a result, your company can reduce its corporation tax liability, making this a highly tax-efficient strategy.

Employer pension contributions are not subject to income tax or National Insurance contributions, so they are a cost-effective way for directors to save for retirement. The contributions do not count towards your personal income tax, and the company enjoys a tax deduction for the amount paid into the pension.

There’s an additional benefit: the contributions are treated as an allowable expense for the company, which lowers the company’s overall profits and, in turn, the amount of corporation tax it has to pay.

3. Contribution Limits and Rules

It’s important to keep track of contribution limits. The annual allowance for pension contributions is currently £60,000, though this could be lower if your income exceeds £200,000 or if you’ve accessed your pension pots before. There are also carry-forward rules that allow you to use unused allowances from the previous three tax years, so you could make larger contributions in one year if you have unused allowance from earlier years.

In addition, it’s important to note that any contributions you make (whether personal or through the company) will count towards your total pension pot. The lifetime allowance for pension pots has recently been abolished, meaning you no longer face a tax charge when your pension reaches a certain amount.

4. Why Choose Pension Contributions Over Other Benefits?

Contributing to a pension as a director is one of the most tax-efficient ways to save for retirement. Unlike other benefits or salary increases, pension contributions made by the company don’t attract National Insurance, which saves both the business and the individual money.

Furthermore, pension contributions are far more flexible than other retirement savings options, allowing you to benefit from tax relief and invest in a range of assets that could grow your retirement fund over time.

Conclusion

As a company director, contributing to a pension offers significant benefits, both for your future and your company’s bottom line. Whether you choose personal contributions or employer contributions through your company, you can save for retirement in a tax-efficient manner while reducing your overall tax liability.

If you’re unsure which option is best for you, or if you need help setting up a pension scheme for your company, don’t hesitate to get in touch with us. At Cadence Accounting, we can guide you through the process and ensure your pension contributions work as hard as your business does.