If you own a limited company and you take both a salary and dividends then the dividends do not count towards your relevant UK earnings which means that only your salary will be used to calculate your pension tax relief limit. If you exceed your limit, you may be subject to tax charges.
What is the pension tax relief limit?
You can receive tax relief on private pension contributions is up to 100% of your annual earnings up to £60,000 per year. Your tax relief is paid at your highest marginal rate, either 20%, 40% or 45% on the basis that any tax relief over the basic rate may need to be claimed via your annual tax return.
How do I increase the amount I can pay into my pension and get tax relief?
As a company owner, the easiest way to increase the amount of money you are paying into your pension and receive tax relief is to make the pension contributions directly from your company as an employer contribution.
Other benefits from making pension contributions directly from your company
Employer pension contributions are classed as an allowable business expense which means that a limited company receives tax relief against corporation tax which could save the company up to 25%.
Another benefit is that employers do not have to pay National Insurance on pension contributions. The 2023/24 National Insurance rate is 13.8%. By paying directly into your pension instead of into a salary, your company will save 13.8%. This is combined with saving up to 25% from corporation tax relief by paying into your pension.
This is likely to be the most tax-efficient way for company owners and directors to pay into their pensions as opposed to paying personal pension contributions. Especially as many directors pay themselves low salaries so therefore will not qualify for a high amount of tax relief.
Find out more about employer pension contributions
To set up employer pension contributions or find out more information, you can book a no-obligation meeting with a financial adviser at Four Wealth Management by calling 0117 973 0500 or book online.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
