Pensions for Limited Company Directors
Pensions may not be your main priority if you’re a self-employed director of your own limited company, but it’s important to think about setting money aside for yourself after retirement.
As a regular employee, your workplace will take care of your company pension on your behalf. But as a sole director of your own business, the responsibility lies with you, and you alone.
What’s more, pension schemes for company directors offer far more than financial security for the future; they can be a very tax-efficient way to save your hard-earned cash.
This article will tell you all you need to know about setting up a director’s pension scheme, and general retirement planning for small business owners.
Pressed for time or want to discuss your pension options in more detail? Give us a call on 0808 189 0463 or submit an online enquiry, and we’ll refer you to a pension specialist.
Do I need a pension if I’m a self-employed limited company director?
No, it’s not essential, but it’s certainly advisable to plan for your future, especially if you’re a high-earning director.
Most pension plans are designed for PAYE earners, with contributions being taken out of your income post-tax.
A directors’ pension scheme can be a great way to take advantage of the remaining tax breaks available to sole traders.
The experts we work with can help answer your questions about sole director pension schemes and help you find a pension to suit your needs, while advising you on the best pension plans and fund protection advice.
Submit an online enquiry so we can arrange you a free, no obligation chat with an expert advisor who will be able to help.
Am I automatically enrolled into a pension scheme as a director?
Automatic pension enrolment was introduced in 2012, and the scheme has made it mandatory for employers to enrol their employees into a pension scheme.
However, if you’re a self-employed director of a limited company automatic enrolment will not apply to you, although it’s still possible to set up a pension plan and make personal or company contributions.
How do pension schemes for directors of limited companies work?
As mentioned, if you’re a director you’re still able to contribute to a pension scheme. Pension contributions can be made from your own personal funds, or directly from your company’s income.
The majority of ltd company directors choose to make their pension payments through their business, as experts will tell you this is the more tax-efficient option:
Pension contributions for limited company directors
If you run your own limited company and take a salary as well as dividends, the latter aren’t classified as “relevant UK earnings”, so your pension tax relief limit is calculated based on what sum you take as income. If you pay yourself a relatively small salary and a large company dividend, your pension tax relief limit will be fairly low. If you exceed this limit, you will be subject to tax charges.
In order to boost how much you can pay into your pension pot while still taking advantage of the tax benefits, you can either increase your salary, or make a contribution directly from your limited company.
Pension contributions made from your limited company
You can also make pension contributions from pre-taxed company income. Employer contributions are classified as “allowable expenses” so your business will receive tax relief, which could save you up to 19% in corporation tax.
We’ll be discussing the tax implications in more detail later on, but if you’d like to talk to one of the experts we work with about your own situation and how best to plan for your future retirement, contact us, and an independent financial advisor will be in touch to answer any questions.
What’s the maximum pension contribution for a company director?
You can pay as much into your pension scheme as you like – to an extent. This is subject to HM Revenue and Customs (HMRC)’s director contribution limits. The total sum you contribute should not exceed your business’s annual income, as this is likely to be flagged by HMRC and could result in them raising questions surrounding whether the funds have actually been generated from your company.
Your contributions will be tax-free unless they exceed the annual allowance of £40,000.
If you have a particularly large amount you’d like to contribute, you may be able to benefit from the “carry forward” rule, which allows you to make use of annual allowances which haven’t been utilised over the previous three years – provided you’ve been a part of a registered pension scheme during this time.
It’s also important to bear in mind your lifetime allowance, which is a limit on how much you can withdraw from your pension without incurring extra tax. At the time of writing, the lifetime allowance is £1,055,000.
What are HMRC’s contribution limits on director’s pensions?
HMRC’s regulations state that the maximum pension contribution for limited company directors before tax relief no longer applies is a gross payment of £40,000 per year. This includes both employer and employee contributions.
Pension planning for high-earning directors
If you’re a high-earning company director, you may be considering ways to maximise your investment returns in a pension product.
A self-invested personal pension (SIPP) can offer you a greater range of investment choices as you can choose from a wider range of assets. SIPPs are also more flexible as you can invest and manage your portfolio regularly. And, as a higher earner, you could gain access to more lucrative SIPP investments.
But how do you source these investments, and how do you know if it’s the right path for you? The specialist financial advisors we work with can help. They are fully regulated by the Financial Conduct Authority (FCA) and have extensive experience in wealth management and pension planning.
For more information, make an enquiry and we’ll match you with an expert shortly.
Corporation tax relief on directors’ pension contributions
Making pension contributions from your limited company tends to be the most financially beneficial approach, because your business may be able to save up to 19% in corporation tax.
Limited company directors are also exempt from paying National Insurance on pension contributions. The rate for 2019-2020 is 13.8%, so you can save by contributing to your pension rather than paying yourself the equivalent salary.
In total, you and your company could save up to 32.8% by paying the funds directly into a pension scheme.
Whether this is the best choice for you will very much depend on your individual circumstances.
It may transpire that making personal pension contributions is more beneficial.
To find out which is the most suitable option for you, assistance in setting up a pension plan or for advice on controlling your director’s pension, get in touch for a free, no obligation chat and we’ll forward your enquiry to one of the experts we work with.
Director pensions rules
If you make pension contributions directly from your limited company, you must abide by the rules for allowable deductions:
The regulations state that any pension contributions should be “wholly and exclusively for business purposes”. If HMRC suspect any suspicious activity, they may open up a case against you.
Speak to an expert for the best pensions for limited company directors
Pensions can be a confusing concept to get your head around, and if you’re running your own business it’s likely you’ve already got enough on your mind. So, why not let us sort it on your behalf?
The independent financial advisors we work with are experts in the field, and have arranged pension plans for countless satisfied customers – including company directors!
So get in touch to discuss your options.
Submit an enquiry using our online form, or give us a call on 0808 189 0463