Why it makes sense to pay a pension out of your Limited company

Pension Plan

If you are the director of a limited company there can be tax advantages of making pension contributions directly from the company rather than personally.

For directors that can take a mix of salary and dividends from their limited company, the amount of pension contributions you can receive tax relief for personally is restricted to the salary taken. This is because dividends don’t form part of “relevant UK earnings” for calculating tax relief.

However your limited company can contribute company income before corporation tax to your pension. Because an employer contribution counts as an allowable business expense, your company receives tax relief against corporation tax so the company will save up to 19% in corporation tax.

A further benefit is that there is no National Insurance charge on employer pension contributions. The National Insurance rate for 2018/19 is 13.8%, so by the company contributing directly into your pension rather than paying the equivalent in salary, you can save up to a further 13.8%.

This means that in total your company can save up to 33.8% by paying money directly into your pension rather than paying money in the form of a salary.

For a higher rate tax payer, compared with making personal deductions this can work out as an extra £5.33 saving per £100 in the scheme whilst for a standard rate tax payer the savings are £5.08 per £100 contributed.

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