Being the director of a limited company comes with a lot of responsibility and perks. But while you spend a lot of time thinking about the future of your business, it’s important to remember to plan for your own future too.
That means making sure that you’ve saved enough money to live out your retirement in style.
As the director of a limited company, you need to take your pension into your own hands. This means paying contributions personally or paying directly through your limited company, which can also give your business some great tax benefits.
Find out everything you need to know in this guide to company pension contributions for directors.
Company director pensions explained
Pensions work in a similar way to any other, where you can make contributions through your own personal funds or through the company’s income. There are a number of different pension schemes that you can invest in, including personal pensions, stakeholder pensions, and more, which we’ll cover in more detail below.
As with any pension, you must set up and choose your pension decisions wisely. This is especially true if you are the sole employee of your limited company, as you won’t be automatically enrolled in a pension scheme.
This guide will provide you the information you need to make an informed choice, but as always it’s worth getting advice from a trusted accountant to help weigh up your options.
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What type of company director pensions are there?
There’s not a single pension that’s right for everyone. There are lots of different types that you can choose from and set up, so it’s important that you make the right decision. So important, that we would recommend speaking this through with an accountant before you rush into any big decisions to find out which plan is right for you.
If you want a basic overview of what’s available, you could choose from one of the following for your director pension.
1. Stakeholder pensions
There’s not a single pension that’s right for everyone, so you should look carefully at the pros and cons of each pension type in detail before you commit the future of your retirement to it.
As a company director, there are 5 different pension types on offer.
2. Group stakeholder pensions
This is a type of stakeholder pension that’s used for a large group of employees. Each employee will get their own pot but are held and administrated together in a group. If you’re the sole employee of your limited company, it’s very unlikely that this will be the option that you would go with.
3. SIPPS (Self-Invested Personal Pensions)
SIPPS, or self-invested personal pensions, are similar to stakeholder pensions but provide a bigger and more diverse range of investments and funds. They are generally more sophisticated and more involved than a stakeholder pension, which will mean you will have to actively make choices about which range of funds or assets you want to invest in.
More choice naturally comes at more of a risk, though. They also tend to have a higher expense fee, so they’re a good choice for people who are pretty savvy with investments or have a great accountant to hand.
4. SSAS (Small Self-Administered Pension Schemes)
A SSAS pension, or a small self-administrated pension scheme (what a mouthful!), is another type of group contribution scheme. In this case, a SSAS has to be set up via a trust for less than 12 members, making it a good option if you employ a small team at your limited company.
These pension schemes are normally a popular choice in family businesses, and it’s even possible in some cases to add family members who don’t work at your company. So if you’re saving for yourself and your family, this could be a good option for you.
5. Multi-Employer Pension Schemes
Multi-employer pension schemes are something that is commonly used with auto-pension enrolment. Rather than putting pensions in place, some employers may use this to provide pensions for employees from a number of different companies and employees. It’s basically a way of designating pensions onto someone else.
Personal vs company pension payments
If you’re a director of a limited company, it’s always recommended that you pay your pension contributions through your company rather than making personal contributions. This is for a number of reasons, including:
Better tax relief
If you contribute through a company, you’ll get better tax savings and reduce the amount of corporation tax that you’re eligible for. This is good for your business and your personal income.
You can save on national insurance
By contributing the money directly into a pension, rather than paying it through your salary, you reduce the amount of income that’s subject to national insurance.
You can contribute more
You can only contribute up to 100% of your salary to your pension if done personally, which tends to be a lot less than what you could contribute if paying directly from the company. For this calculation, dividends don’t make an impact – so it would be just the PAYE wage amount that you can contribute.
Also, it’s worth noting that you’re not prohibited from one method if you choose to contribute another way. If you pay regularly through your company, you could choose to make additional personal contributions into the same pot. It’s your future, so there’s no limit on how you want to save for it.
Pension payment limits for personal and company pensions
A company can pay as much as it wants into a pension scheme, as long as it doesn’t go above HMRC’s director contribution limits. This means that the total amount cannot exceed your business’s annual income – which is a reasonable request for the longevity of your business.
If you’re looking to sell up and retire, there are better ways to do that than just throw everything into your pension and quit. You can find out more about the process of selling and buying a business in the UK here.
Personal payment amounts into a pension are limited to 100% of your salary. In the grand scheme of things, though, this might not be very much for a limited company director.
Most directors tend to take lower salaries and instead take profits through dividends. But for company pension contributions for directors, dividends aren’t included in this calculation, making the maximum contribution amount lower than anticipated. For this reason, and some others, many directors will prefer to make up the majority of pension contributions through their limited company rather than personally.
Director’s pension tax relief explained
Company contributions to a director’s pension will be tax-free – provided that they follow certain guidelines.
Firstly, limited companies cannot exceed the annual allowance of £40,000 per year. There are some exceptions to this where you might be allowed to contribute a bigger, one-off sum by rolling over your annual allowance from the past 3 years.
For example, if over the past 3 years you’ve only contributed £20,000 to your pension, you will have £20,000 of annual allowance left over. So, you could contribute £100,000 tax-free by using your leftover allowances, provided that you’ve been enrolled in an eligible pension scheme over this time.
If you’ve only just set up your pension, you won’t have any previous allowances to cash in.
Secondly, your company pension contributions for directors will be tax-free, provided that the contributions are ‘wholly and exclusively’ for the purposes of business. This is a phrase we’ve discussed a lot when it comes to allowable expenses but basically means that you’re not extorting money for your personal interests.
When it comes to a director’s pension, this means that the amount being paid is fair and doesn’t exceed the company’s annual profits. If you employ others, this will also be measured against how much you pay into their pension schemes to ensure that people are being treated fairly.
If you’re the sole employee, this won’t normally be flagged unless you’re saving extortionate amounts into your pension. But if you’re ever unsure, it’s always best to speak to your accountant.
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The benefits of contributing to director’s pensions
As we discussed above, you can contribute up to £40,000 a year tax-free as an allowable business expense, which could save you up to 19% in corporation tax.
What’s more, you won’t have employer National Insurance on pension contributions. So, by contributing directly into your pension rather than paying the equivalent in salary, you can also save up to 15.05%.
In total, this contributing directly into a director’s pension can save your limited company up to 34.05%. That’s not just building your future but providing better cost savings for your limited company.
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Making the most of company pension contributions for directors
Although a lot of factors will depend on the individual nature of your limited company and pension plans, company pension contributions for directors have great benefits not only for your future but also for your company.
Thanks to tax-free allowances of up to £40,000, contributing to a pension could save money over personal contributions, giving you a better value for your investment.
As always, before you make any decision about money and investing -– you need to talk to your accountant to look at your personal situation and ensure that you’re making the right decision. And if you haven’t already, you’ll want to invest in some accounting software to make sure your books are in order and keep this process with your accountant as smooth and slick as possible.
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