BUSINESS IN FOCUS


PEnSIon contrIbUtIonS – YoU or YoUr comPanY?


onE of thE moSt tax-EffIcIEnt thIngS YoU can do IS maKE a PEnSIon contrIbUtIon. a PEnSIon contrIbUtIon IS a bIt LIKE addItIonaL tax-frEE SaLarY, onLY YoU can’t gEt YoUr handS on thE monEY ImmEdIatELY.


P


ension contributions can be treated as an allowable business expense and offset against your


company’s corporation tax bill.


If you run your own business either as a sole trader or as a limited company, you can make personal contributions to a pension or you can make contributions through your company.


these options bring tax advantages, and what’s right for you will depend on your individual circumstances, but here’s a summary of some of the tax implications for each option.


maKIng PErSonaL PEnSIon contrIbUtIonS When you pay money into a pension, you receive tax relief that reflects the rate of income tax you pay. this means that, as a 20 per cent taxpayer you effectively only pay £8 to save £10 into your pension. as a 40 per cent taxpayer you effectively only pay £6 to save £10 into your pension and, as a 45 per cent taxpayer, you effectively only pay £5.50 to save £10 into your pension.


although there’s no limit to the amount you can pay into your pension, there are limits to the amount you can contribute and still receive tax relief. the limit is currently 100 per cent of your income, up to the annual allowance threshold of £40,000. this threshold will reduce to £10,000 for individuals with income of £210,000 and above. If you exceed these limits, a tax charge will be incurred.


any unused annual allowances in the three previous tax years can be carried forward provided you were a member of a registered pension scheme.


44 - PharmacY In focUS


there is no limit on the value of pension savings that can be built up in a pension pot. however, if the value exceeds the lifetime allowance when the pension is drawdown, the amount in excess of the lifetime allowance will be subject to a tax at 25 per cent on any income taken or 55 per cent lump sum payment.


If you earn less than £3,600 annually - or don't earn anything - the maximum amount you can contribute to your pension within the tax relief limit is £3,600 (gross).


maKIng PErSonaL contrIbUtIonS aS thE dIrEctor of a LImItEd comPanY If you own a limited company and you take both salary and dividends, the dividends don’t count as ‘relevant UK earnings’, so only the amount of money you take as salary will be used to calculate your pension tax relief limit.


relevant UK earnings include employment income, trading income, income from furnished holiday lettings and patent income. Extracting profits from your company in the form of rental or interest do not count as earnings for pension tax relief.


this means that, if you take a small salary and a large dividend from your company, your pension tax relief limit will be low. If you exceed your limit, you will face tax charges.


therefore, if you want to increase the amount of money you can pay into your pension and still enjoy the tax benefits, you can either increase your salary, or make the pension contribution straight from your company as an employer contribution.


maKIng EmPLoYEr contrIbUtIonS dIrEctLY from YoUr LImItEd comPanY Your limited company can contribute pre-taxed company income to your pension. because an employer contribution counts as an allowable business expense, your company receives tax relief against corporation tax, so the company could save up to 19 per cent in corporation tax.


Your contributions must abide by the rules for allowable deductions. the rules state that the pension contributions should be ‘wholly and exclusively’ for the purposes of business.


to figure out whether this is the case, hmrc look for certain evidence, for example whether other employees are receiving comparable remuneration packages.


another benefit is that employers do not pay national Insurance on pension contributions. the national Insurance rate for 2017/18 is 13.8 per cent, so by contributing directly into your pension rather than paying the equivalent in salary, you save up to 13.8 per cent.


this means that in total, your company can save up to 32.8 per cent by paying money directly into your pension rather than paying money in the form of a salary.


depending on your circumstances, this may or may not be more beneficial to you than paying personal pension contributions.


concLUSIon Saving in a pension is a tax-efficient way of building up income for retirement. there are also the added advantages of:


(1) Your pension fund grows largely tax-free; and (2) You can usually take up to 25 per cent of your pension savings tax free once you have reached 55 years of age.


If there is anything in this article that affects you or somebody you know, please speak to Steven mcvitty for independent professional advice.


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