As a limited company director and owner, contributing to your pension is something that you need to know about as it can have significant tax advantages.
State Pension
The first point we’ll discuss is that if you pay yourself a salary under the Lower Earnings Limit (£6,240 a year for 2021/22) you will not accrue qualifying years for your state pension.
You need at least 10 qualifying years on your record to get any State Pension and you’ll need 35 qualifying years to get the full new State Pension. If you have between 10 and 35 years, you’ll get a proportion of the State Pension, so it’s worth taking this into consideration to accrue as many years as you can to get the most out of your State Pension. You can find out more about your state pension here.
Pension tax relief
When you pay money into your pension, you receive a tax relief that is related to the income tax rate that you pay. Dividends are not included in this, so this means that if you take a low salary and a large dividend, you won’t get as much pension tax relief as you would if you had a high salary.
There’s no limit on how much you can pay into your pension, however, there are limits on the amount of tax relief you can receive. The limit is currently (2021/22) 100% of your income, up to a maximum of £40,000. So, the lower your salary, the lower the maximum tax relief is. Anything over this limit you’ll have to pay an annual allowance charge.
As you’re a director you’re still counted as an employee and an employer and as an employer, you can make pension contributions from your company that can be counted as an allowable business expense, which means, that you will not have to pay corporation tax on it and reduce the overall amount of corporation tax that you have to pay.
Contributing to your pension through your company as an employer, you won’t have to pay National Insurance on these contributions either, so again, you’ll be paying less tax.
To make sure you are contributing the right amount and doing so correctly and complaint to legislation. You should seek advice from a pension specialist or an accountant.
If you’re ready to start your limited company and become a director, click here to take the first step and make sure your business name is available to register.