Pension Contributions | Personal or Company?
Many of the businesses we deal with are owner managed limited companies, where the owner/director could be the only employee. In this situation the owner/director can choose to make pension contributions either personally or via the company. We are often asked which way is best and we thought it was worth highlighting the key differences for consideration.
- The owner/director will draw an income, normally broken into an element of PAYE remuneration and Dividend payments.
- Pension contributions paid “personally” attract basic rate tax relief at source, increasing the value of the contribution. Higher/additional rate tax is claimed via self-assessment.
- Whilst higher rates of tax relief can be obtained on personal contributions, individuals withdrawing a smaller salary will be limited in the amount they can contribute.
- An individual can make contribution of up 100% of their “relevant” earnings, subject to their available Annual Allowance for tax relief. Relevant earnings include salary but not dividends.
- Rather than draw extra income to pay a personal contribution, contributions can be paid by the company.
- Company contributions are not limited by the individual’s relevant earnings but must meet the “wholly and exclusively” rules ensuring that the pension remuneration is appropriate to that individual. The individual’s available Annual Allowance needs to be considered.
- Company contributions are a tax relievable expense resulting in a reduction in Corporation tax. Unlike a personal contribution, no individual tax relief is added to the contribution.
- Pension contributions provide a tax efficient method of extracting money from a company, with no tax or national insurance liabilities on the money paid to the pension.
In summary, there are benefits of making both personal and company contributions and the optimal method would be to make a combination of both, if possible. However, in reality it will depend on the individuals financial needs and business profits. In many cases we find that, making employer contributions tends to work best for many business owner/directors.
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Ricky Clark | Financial Planning Consultant
Email: email@example.com or tel: 01382 207067
Jonathan McDowall | Financial Planning Consultant
Email: firstname.lastname@example.org or tel: 01382 207067