A Guide to Company Director Pension Contributions in the UK

Ryan Patrick

• 9 min read
A Guide to Company Director Pension Contributions in the UK

Retirement planning is vital for every director working in the UK. One of the most significant ways of retirement planning is director pension contributions. As a director, you can make pension payments through your limited company or into a private pension from earnings and enjoy significant tax savings.

This guide explores the must-knows about company director pension contributions, including what they are and the benefits and drawbacks of making them. You will also uncover the types of pension contributions available, contribution limits, and pension tax relief. We've also included current tax rate figures for 2024-25 to help you understand pension contributions better.

What are Company Director Pension Contributions?

The company director pension contribution is the money your company, or you, pay to the payment scheme. These contributions ensure you have a source of income even after your retirement.

Setting up a pension may not be of utmost importance when starting your company; however, regular contributions build up your pension pot, providing financial stability in your later years.

Company directors have two pension types, namely:

  1. Personal pension scheme
  2. State pension scheme

The state pension cannot provide sufficient income after retirement, so ensure you set up a personal pension. With the two pensions, you can have a comfortable retirement life.

On top of offering financial stability, a private pension is a tax-efficient way to pocket the profit from the company since you make payments from your salary.

Let's have a look at each of these pension contributions

Private Contributions

You can pay personal contributions to a personal pension via your PAYE director's earnings. You'll receive a 20% tax relief bonus on each contribution you pay from the government.

For instance, if you contribute £100 to your pension pot, the government will add £20. The tax relief will be more significant if your higher rate (40%) or additional rate (45%) taxpayer.

This bonus cancels out income tax deducted from your earnings via PAYE before the payment goes to your director pension. It's reimbursement of the tax paid to HMRC. The government offers this incentive to encourage individuals to save for retirement.

Unfortunately, the tax-free contributions are for a £60,000 annual allowance tied to your salary. If you're an additional rate taxpayer, your yearly allowance will decrease gradually on income beyond a certain threshold.

You should note that the £1 073,100 lifetime allowance was abolished on 6th April 2024

Can a Director Pay Pension Contributions from their Dividend Earnings?

It's possible to make private contributions from your dividend income, but it's not advisable; this is because:

  1. You get dividends from the company profits after the corporation tax deductions
  2. Pension contributions made from dividend income do not qualify for any tax relief
  3. You'll be taxed on dividend income that exceeds your £500 annual dividend allowance

So, it is advisable to pay private contributions from your PAYE director's earnings rather than dividends. However, many company directors opt for a small salary capped at the tax-free personal allowance of £12,570 and receive the rest as dividends.

Although this method is the most tax-efficient way to get money from the company, your private contributions from the salary will be below the annual pension allowance of £60,000.

You can opt to make additional pension payments from your business. This approach provides more tax benefits than increasing your salary or making pension contributions through dividends.

Limited Company Pension Contributions

The annual pension allowance limit or salary threshold does not limit pension payments made directly from your company. This means you can contribute above £60,000 into your pension pot, provided this amount doesn't exceed your business annual profits.

For example, if your business generates a profit of £50,000 in a tax year, that amount would be the maximum contribution that your business will make to your director pension.

HMRC considers pension contributions deductible business expenses if they are solely for the purpose of your trade, profession, or vocation.

This means you can deduct the payment from your company's profits, decreasing the corporation's tax liability. Based on your company's annual profit level, this offers tax relief ranging from 19% to 25%.

Company pension contributions are not subject to NIC, income tax, or dividend tax. Due to the corporation tax savings, you won't receive the yearly allowance tax relief on any company contributions in your director pension.

What's the Highest Sum I Can Pay to a Director Pension?

There are no restrictions to the maximum amount you can contribute to a personal pension. This means you can contribute as much as you want.

But there are specific limits that restrict tax relief you can get on these pension contributions, including:

  1. Annual allowance: £60,000
  2. Lump sum allowance: £268,275
  3. Lump sum & death benefit allowance: £1,073,100

Annual allowance

Personal allowance is limited by an annual allowance of £60,000, or 100% of gross PAYE earnings, whichever is less.

This is the maximum you can contribute to your pension yearly before filing taxes. It includes the company and private contributions along with the tax relief provided by the government that contributes to your pension fund.

Let's have an example:

  1. If you have a director salary of £60,000 or higher, the most you can contribute in your pension pot this year to receive tax relief is £48,000. The additional £12,000 will be covered by the government's 20% tax relief bonus.
  2. When £12,570 is your director's salary in the current year, you can contribute £12,570 to your director's pension to receive tax relief. The government will then provide a 20% tax relief bonus amounting to £2,514.

However, a tapered annual pension allowance applies if:

  1. Your income bracket is above £200,000
  2. Your 'adjusted income' exceeds £260,000

If your incomes fall into these brackets, your annual allowance will taper by £1 for each £2 of adjusted income exceeding £260,000. Suppose your adjusted income is £280,000. Your yearly allowance will be tapered to £50,000.

The reduction stops at £360,000, meaning each individual receives a minimum annual allowance of £10,000. However, the adjusted income and threshold income limits vary for tax years up to 2022-2023.

Lump sum allowance

The UK government introduced the individual lump sum and death benefit allowance and lump sum allowance to replace the lifetime allowance on 6 April 2024. These allowances restrict the tax-free benefits a director can receive from their pension schemes.

You can withdraw up to 25% of the value of your director pension as a tax-free lump sum. However, the highest amount you may receive under the individual allowance is £268,275, though it might be more if you have a protected allowance.

In specific scenarios, this allowance can provide your beneficiaries with a lump sum of a maximum of £1,073,100 tax-free. For instance, you may require a lump sum due to severe sickness, or your beneficiaries may need the amount for death benefits.

If the lump sum exceeds the allowance, the extra money will be subject to income tax. The pension provider will deduct the fee before issuing the payment.

What's Lifetime Allowance Protection?

Although the lifetime allowance was abolished, you may apply for lifetime allowance protection if you had pension savings before April 2016. Remember, this protection also applies to lump sum & death benefits and lump sum allowance.

What happens when your Pension Contributions are over your Annual Allowance?

It's your responsibility to keep track of your contributions; however, if they exceed the annual allowance for the current tax year, your pension provider will notify you. In that case, you or the pension provider must pay an allowance tax charge on excess pension contributions.

Even if your pension provider covers part or all of the charge, you must report it in your upcoming Self Assessment tax return's 'Pension savings tax charges' section.

Can I Claim Tax Relief on the Director's Pension?

You can claim tax relief on your director's pension. When you pay personal contributions, the pension institution claims the initial 20%tax relief (relief at source) on your behalf. This amount matches the basic rate of Income Tax, which you've paid on your PAYE from your earnings.

If the government approves your claim, the tax bonus will be added to your pension pot within three months. Additional rate and Higher rate taxpayers from Wales, England, and Northern Ireland must claim additional relief personally when filing the self Assessment tax return. The additional rate taxpayers can claim an extra 25%, while high-rate taxpayers may claim a further 20% relief.

For Scottish income taxpayers, your pension institution will apply for a 20% tax relief on any amount you've paid 19%. You are not required to cover the difference. More so for payments made into a private pension above the 20% tax band, you may request additional relief via Self Assessment for:

  • 1. 1% on amounts subject to 21% tax
  • 22% on amounts subject to 42% tax
  • 25% on amounts subject to 45% tax
  • 28% on amounts subject to 48% tax

You can also contact the HMRC to claim the relief if you don't submit the Self Assessment tax return. If you don't receive your tax relief or miss to claim additional tax relief you owe, you can date back it up to four years.

Can I claim an unused Annual Pension Allowance?

You may carry forward your unused annual pension allowance up to the previous three years. This means you can go beyond your yearly allowance and still enjoy the tax relief bonus if you haven't made the maximum contribution in one or all of the previous three years.

For instance, if you haven't made pension payments for the last three years, you can pay a backdated contribution of £140,000 inclusive of tax relief.

Carry forward rules

To qualify for carry forward, you must meet the following criteria:

  1. You must have enrolled in a UK-registered pension scheme or an overseas qualifying pension scheme for the tax years you intend to carry forward. Remember, the state pension system doesn't count toward this requirement.
  2. Earn the amount you intend to contribute in the current tax year.

The carry forward rules are beneficial if:

  1. Your salary fluctuates every year
  2. You earn over £60,000
  3. Business expenses are high, or profits have been low in the last three years, which can prevent you from making maximum pension contributions.
  4. You're aiming to supplement your pension savings while considering the tapered annual allowance based on your earnings for the current tax year.
  5. Your business profits are high, and you'd wish to invest the amount in your pension.

What are State Pension Qualification requirements?

A state pension is a regular payment provided by the government to many people when they reach a state pension age. Your NIC determines the retirement pension you will receive, with the highest amount currently available is £221.20 weekly or £11,502.40 annually.

You will be eligible for a full state pension with 35 qualifying years of National Insurance contributions. To receive any state pension, you must have ten qualifying years.

However, even if you were to receive the full state pension, it would not offer you a comfortable retirement. That's why setting up a personal director pension and enjoying tax reliefs on your private and company contributions is advisable.

If you want to see more of your state pension forecast, go to GOV.UK and see how much you're eligible for. You should also check your NIC record to see if there are any gaps and if you can make voluntary payments to fill those gaps.

Benefits of Director Pension Contributions

Making director pension contributions has the following benefits:

  1. Tax relief: a significant benefit of pension contributions is receiving tax relief. The UK government encourages pension saving by providing tax relief on contributions up to specified thresholds. This implies that the sum you invest in your pension is subtracted from your taxable income, decreasing your income tax liability.
  2. Long-term growth potential: The pension may grow with time because of investment returns. It is advisable to start contributions early and consistently, enjoy compound interest, and build a healthy retirement fund.
  3. Employer contributions: as a director, you may benefit from company and personal contributions. Most companies offer pension packages that can significantly boost your retirement pension.

Director Pension Contributions Drawbacks

  1. Contribution limits: There are restrictions on the sum you can contribute to your pension while qualifying for tax relief. Exceeding these limits can lead to extra tax penalties.
  2. Limited access: Stringent guidelines govern pension contributions. You can't access your pension savings until you turn 55 unless you are under certain circumstances like ill health. This limitation means your funds are inaccessible to other financial requirements or unforeseen situations.

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Winding Up

Company director pension contributions are one of the best ways to pocket more profits from your company and accumulate more money for retirement. You will enjoy tax reliefs and savings if you make these payments appropriately through the director's earnings and company profits.

The company makes a company director pension, while you make a private pension through a pension institution. Pension matters can be complex, so you should contact a financial advisor or accountant to help you. These experts may advise on the best director pension scheme that suits your case. If you have any questions on company director pension contributions in the UK, don’t hesitate to contact us here, and we’ll do everything we can to help.