Last Updated on February 26, 2025 by admin
Having a retirement plan as a director is important since it allows you to invest now for financial security before you retire. In the UK, directors can improve their retirement savings through a pension plan. Directors can have two sets of pension contributions, that is, a state pension (if you are eligible) and a self-invested personal pension.
How does a company pension contributions for directors work? Here is a guide that will help you understand the tax benefits of directors’ pension contributions, the types of contributions you can make, and contribution limits.
Why does a director’s pension matter?
Directors’ pensions are important since it helps them save money for retirement in a tax-efficient way. The pension can be beneficial in so many ways, such as;
Build wealth: Pension contributions slowly builds the directors’ wealth which will be beneficial once they retire. The pension can also help a company build its net worth for retirement.
Tax relief: Contributions for the director’s pension are tax-free. The money is always deducted from the director’s taxable income reducing the overall tax bill.
Cash transfer: With a pension, directors can easily transfer cash from a company’s account into an investment policy in the director’s name.
Business expense: Company pension contributions for directors are considered business expense meaning directors don’t pay income tax or national insurance contributions on the money.
What are the different types of pension contributions?
Defined contribution:
These are personal contributions also known as ‘money purchase’ pension schemes. These contributions can either be workplace pensions arranged by your employer or private pensions arranged by yourself.
Pensions paid by yourself or the company can be put into investments by the pension provider. The investment can either be shares meaning the value of your pension pot can go up or down depending on how the investments perform.
Some schemes move your money into lower-risk investments as you get close to retirement age. You ask your provider if it does not happen automatically.
Company pension contributions for directors are not limited by the salary threshold or the annual pension allowance limit. Consequently, you can pay more than £60,000 per year into your director pension pot as long as the total amount does not exceed your company’s annual profits.
The amount you get from your pension depends on how much was paid, the interest gained from the investment, and how you decide to take the money.
Generally, you are allowed to withdraw up to 25% of the accumulated funds in any pension as a tax-exempt lump sum.
If you have a protected allowance, it may enhance the tax-free lump sum you are eligible to withdraw from your pensions.
Typically, the pension provider deducts a minor percentage as a management fee, it is advisable to inquire about the specific amount they will charge.
Self-Invested Personal Pension Scheme (SIPPS):
This is a flexible way for directors to save for retirement. This is ideal for self-employed individuals or you want to save alongside your company pension. With this pension plan, you decide how much and when to save.
This pension scheme allows individuals the freedom to allocate their assets to a wide range of investments approved by HM Revenue and Customs (HMRC). Approved investments include equities, fixed-income securities, collective investment schemes, and exchange-traded products (ETPs).
Whenever you pay money in, the government tops it up making the scheme tax efficient. For example, if you are eligible to put £100 into your account, you must only contribute £80 and the government will add the remaining £20 to your SIPP. The value of pensions may fluctuate, potentially resulting in a return that is less than the amount contributed. Your tax benefits will depend on your circumstances and may change in the future.
What are the tax implications on the director’s pension contribution?
Tax implications on the director’s pension contribution can vary significantly depending on the contribution. Directors can receive tax relief on personal pension contributions at their marginal tax rate. For instance, if a director is a higher-rate taxpayer, they can benefit from 40% tax relief on their contributions. This means that if they contribute £8,000 from their net salary, the government adds £2,000 through tax relief, giving them a total of £10,000 in their pension.
Company pension contributions for directors are typically tax-deductible for the company, reducing its taxable profits. This practice benefits the company as well as the directors.
As of the 2023/24 tax year, the annual allowance for tax relief on pension contributions is £40,000. However, it may be lower for high earners with threshold income over £240,000 and adjusted income over £312,000.
The lifetime allowance represents the upper limit on the total value you can build up in your pension without facing a tax penalty. As of 2023, the lifetime allowance was abolished, meaning you can save as much as you want without penalties—however, this may still impact your tax situation when you withdraw funds.
Contributions made to a pension scheme benefit from tax relief at the individual’s marginal tax rate. For example, if a higher-rate taxpayer contributes, they effectively receive 40% tax relief on those contributions.
Can directors make pension contributions from dividend income?
As a company director, you can make additional contributions from dividend income, however, it is not recommended. Pension contributions from dividends do not get any tax relief. This is because one does not pay tax on any dividend income that falls within your Personal Allowance.
Dividends are paid from company profits after the deduction of Corporation Tax, however, dividend income above £500 will be paid for tax.
Directors need to contribute their pensions from their income rather than the dividends. However, most directors pay themselves a small amount that falls under the Tax-Free Personal Allowance of £12,570 and then take the rest from dividends.
As much as dividend contribution on personal income is the most tax-efficient way, the contributions will be below £60,000 (the annual pension allowance). You can opt to have additional personal pension payments rather than contributing through dividends.
What is the highest amount a director can pay for a pension?
There are no restrictions on the amount to contribute to a pension, however, there are specific limits that restrict tax relief. For an annual allowance of £60,000, or 100% of gross PAYE earnings. For lumpsum allowance is limited to £268,275 and the lump sum & death benefit allowance is limited to £1,073,100.
FAQs
Q: What is a director’s pension?
Ans: A director’s pension is a retirement plan that allows company directors to save in a tax-efficient way.
Q: How much can a company pay into a director’s pension?
Ans: There are no restrictions on the amount a director can contribute to a pension. However, there are specific limits that restrict tax relief such as £60,000 for annual allowance, £268,275 for lumpsum allowance, and £1,073,100 for the lump sum and death benefit allowance.
Q: Can a company pay into a director’s pension?
Ans: Yes, a company can pay into a director’s pension in a tax-efficient way. Company pension distribution for directors reduces taxable profits and corporation tax liability.
Q: Are director’s pension contributions tax deductible?
Ans: No, the director’s pension contributions are not tax-deductible since pension contributions are deducted from the net pay of the director. However, pension contributions from dividends do not offer tax relief.
Q: Are company directors entitled to the state pension?
Ans: Company directors can be eligible for state pension if they meet certain criteria such as earning a salary above the Lower Earnings Limit. In 2024/25, the Lower Earnings Limit is £6,396, and it will increase to £6,500 in April 2025.
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