There are many benefits to being a director of your own limited company. One being you can pay more into your pension while taking advantage of all the tax benefits which come with it. But like anything, there are limits to what you can and can’t do. We’ll guide you through how to be more tax efficient when paying into your pension as a company director.

What is a company director?

A company director is appointed under the Companies Act 2006 to oversee and manage the business on behalf of its shareholders. If you’re a company director, you’ll have to think of everything from the short-term to the long-term – each and every decision you make is critical. So, it’s important to know the business inside and out. Great if it’s your own limited company you’re running!

On top of being the eyes and ears of the business, you’ll also be in charge of ensuring all the legal bits, such as confirmation statements and annual accounts are sent to Companies House on time.

Do I need to enrol myself into a pension through my company under automatic enrolment?

It’s a legal requirement that every employer with at least one employee must automatically enrol those who are eligible into a workplace pension scheme.

Things can get a little complicated for company directors though, and even with an employment contract, you could be exempt. It basically boils down to whether you’re classed as a worker, or not.

This can change quite quickly though. For example, if you have two directors with employment contracts, they will need to be auto enrolled into a workplace pension just like any other employees who are eligible.

Can directors set up a workplace pension even if they’re exempt?

Absolutely. Even if you aren’t considered an employer when it comes to automatic enrolment, you can still set up a workplace pension anyway. Whether it’s just you in the business, or a group of directors.

How do I make pension contributions?

In most cases, individuals can pay 100% of their salary into their pension, and up to £60,000 per tax year is tax-free. Lots of company directors decide to pay themselves a smaller salary and take the rest of their income as dividends to be more tax efficient. Dividends don’t count as part of your salary though, so you can’t contribute them into your pension as part of your salary.

The good news is that being a company director means you can also contribute to your pension through your limited company.

Are contributions to my pension via my limited company tax efficient?

They can be. You have the option of paying into your pension as an individual, or through employer contributions – and it is possible to claim tax relief on the two. When you make pension contributions through your own limited company, you’re both saving for the future, and also reducing your company’s taxable profits – which in turn, reduces how much Corporation Tax you need to pay.

Employers also don’t need to pay National Insurance on pension contributions, saving the company a further 13.8%!

Is there a limit to how much I can contribute before paying tax?

If you’ve decided to pay into your pension personally, the limit you can pay in before you’ll need to pay tax for the 2024/25 tax year is £60,000. This amount is also called your annual allowance.

You can receive tax relief on private pension contributions that are worth up to 100% of your annual earnings if they’re within this threshold, which is either given automatically, or you’ll need to make a claim depending on which pension scheme you’re with.

The tax relief you receive depends on the tax rate you pay. For instance, if you’re a 40% higher rate taxpayer, a £100 contribution would cost you just £60 because the government will pay £20 into your pension immediately, followed by an additional £20 when you reclaim it on your tax return.

 
There’s no limit to how much you can contribute through your company although this cannot exceed your company’s annual profits. Doing so could raise a few eyebrows!

 
Need help with your limited company? Give us a call on 020 3355 4047, or get an instant quote.