Most of our clients are small limited companies and a hot topic that we are asked about a lot is pensions plans. If they make sense? If they are a requirement? How to set up a pension plan? What is the most tax efficient method for pension planning?
So, to help other small business owners, we thought we would share our gathered knowledge on how to manage a pension scheme and make contributions from your limited company in this post.
Whilst we are not financial advisors, and are not recommending any special pension plans or products, we hope that this article will outline some basics to give you a good understanding of the world of pensions and how they work, especially if you own a Limited Company (even a small one).
What we can do is advise you specifically how to manage pensions relating to your business and your taxes. That’s our thing!
Let’s start with some pension basics and take it step by step.
What is a personal pension?
A personal pension plan is a savings plan for your retirement that you have arranged yourself. It is a separate pension plan from the state (government) pension scheme or a company pension scheme.
Any pension scheme is made up of contributions by the investors to create a large pot of money that is usually invested by a pension fund into stock markets. How much money you receive on retirement depends on how well the investments have done over the period that you have invested.
The pension fund manager (usually an institution) will charge a small percentage to manage the fund on behalf of everyone who contributes, which keeps the costs fairly low.
These days it is quite normal to have a choice about which funds your pension is invested in or at least provide guidelines to the fund manager about what is acceptable to you. Many pension funds are beginning to divest from fossil fuels for example, so there are numerous green or ethical funds as alternatives. A good pensions advisor will be able to give you some good options.
Normally, the biggest factor in determining the amount of money you will have at your retirement is time - due to compound interest. Therefore the earlier you begin a pension plan, even if you start with small contributions, the better the outcome.
There are usually limits about when you can draw your pension but this is much more flexible than the state pension. Most private or company (workplace) pension plans will allow you to draw from around 55 years old. Obviously this begins to reduce your pension pot so there are pros and cons to this, but if early retirement is your goal, then a personal pension plan is a must.
Once you reach the approved retirement age, you will usually have the option to draw your entire pension pot out at once, or take a regular (annual or monthly) amount from it. There are advantages and disadvantages to both these options so it’s always worth discussing that with your financial advisor. You can also continue to contribute to it.
Unlike the state pension, a personal pension becomes part of your estate upon your death. So if you are unable to use it all up then it can be left in your will.
Is a company pension the same as a workplace pension?
Yes. A workplace pension scheme and a company pension are the same thing. They are pension plans that are arranged by your employer or in the case that you own the company, by you.
Any business that has employees must provide a workplace pension and put a percentage of the employee’s pay into the pension scheme each payday.
A company/workplace pension scheme must also include contributions from the company/employer if the employees earn more than:
£520 a month
£120 a week
£480 over 4 weeks
Can a director have a company pension?
Yes, and you should. It brings significant benefits to both the company and you as the director. Like a 19% benefit. That means for every £100 you contribute to your company pension, due to the tax relief, actually £119 is being invested.
Whilst there is no limit to the amount you can personally contribute to your company pension fund, the tax relief aspect is capped at 100% of your salary up to a maximum of £40,000.
So, basically if you pay into a personal pension you can only pay in up to your salary with a maximum of £40k. This doesn’t really work for most small limited company owner/directors as they tend to take a small director salary plus dividends.
BUT if instead the limited company pays directly into the pension, then these limits don’t apply. This is why it’s really important to get your accountant as well as your financial advisor to help you navigate setting up your workplace pension scheme so that everything is in order in case of an HMRC compliance check.
Pension Bee also have an easy to understand article which explains a bit more about making pension contributions from a limited company.
Do I need to declare my pension contributions on my personal tax return?
Yes, if you make personal pension contributions, no if your company pays directly into the pension fund for you (if the company pays then it is a tax allowable business expense and is taken care of in the company corporation tax return).
What is pension tax relief? Do companies get tax relief on pension contributions?
How does a 19% savings on corporation tax sound? The employer contribution to a workplace pension counts as an allowable business expense.
The company also saves on National Insurance contributions. Any pension contributions as part of a remuneration scheme are free from NI, which is currently 13.8%. So instead of taking a pay rise, consider a bump in your pension instead or a little of both and keep the taxes for the company down.
One important note on this topic is that the tax relief is not automatic. Therefore you need your accountant to make sure that you are benefitting from this.
Do company pensions count towards annual allowance?
Yes, company contributions do count towards the annual allowance of £40k.
What are the benefits to my limited company in contributing to my pension?
The key benefit is the tax efficiency which we have already outlined, both corporation tax and national insurance - that’s a potential saving of 32.8% - which is not to be sniffed at!
This makes it a really attractive way for small limited company directors to plan for their retirement while saving their company some tax.
But also, remember if you employ staff then you HAVE to provide a workplace pension for all your employees earning over the threshold. But don’t see it as a burden, it’s a great incentive for attracting and retaining quality employees.
Increasing employer pension contributions above the minimum requirements is second only to better holiday entitlement on employees’ wish lists according to a YouGov survey. The same survey discovered that more than half of employees would increase their own contribution to their workplace pension if their employer did.
We think it’s fair to say that contributing to a workplace pension is a really important tool for improving employee well-being and therefore productivity.
If you only employ yourself as a director, then you can opt out of providing a workplace pension for yourself, but we can’t think of a good reason to do that. It’s a great benefit for you and your Limited Company!
Need some more information or advice about the most tax efficient way to set up your company pension scheme? Get in touch:
☎️TEL: 01480 775 611
📧hello@evolveaccounting.uk