3 Mins
Pension contributions can be very tax-effective – but should these be paid from personal income or directly by your company?
In this article, we share the main differences between pension contributions when made on a personal basis vs a limited company basis.
How do personal pension contributions work?
Pension contributions paid on a personal basis initially attract basic rate tax relief meaning that your pension contributions are increased towards your pension fund. As an illustration, if you were to pay £100 net from your salary, you would have your pension grossed up by basic rate tax relief, meaning you’d receive £125 into your pension fund.
If you’re an individual who draws an additional rate or higher rate tax income from your business, you may be entitled to further tax relief via your pension. This is done by completing a self-assessment tax return on an annual basis. Whilst higher rates of tax can be obtained on personal contributions, those that may be drawing on a smaller salary will be limited to the amount of personal contributions they can pay.
An individual can make contributions up to 100% of their relevant earnings, subject to annual allowance limits for tax purposes. However, be aware that relevant earnings include salary but not dividends.
How do company pension contributions differ?
Rather than having to draw extra income to pay contributions towards your pension, your company can pay contributions on your behalf. Company contributions are not limited to an individual’s relevant earnings. However, there are certain rules around the pension contribution to ensure that it’s appropriate for that individual in question.
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What are the benefits of company pension contributions?
A benefit of a company contribution is it’s a tax relievable expense for the company. However, unlike a personal contribution, there will be no tax relief added on a personal basis. Making a pension contribution from the company is a tax-efficient way of withdrawing money from your business with no tax or national insurance contributions payable on the amount paid to the pension.
In conclusion
As an individual or a business owner, you’ll have many important things to think about like the day-to-day running of your business. However, considering your own financial circumstances is as important, and a common way of doing so is withdrawing capital from your business and paying this towards your pension. The benefits of doing so are that you’re covering your future pension outcomes in retirement, and you’re also able to withdraw capital from your business in a tax-efficient way.
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