Being self-employed or the director of a limited company has obvious benefits. However, company directors and self-employed individuals are often at a disadvantage when it comes to pension planning. This is predominately due to not there being auto-enrolment requirements for self-employed people. Auto-enrolment which is where a pension is set up for eligible employed workers through their employer and employees benefit from both employer and employee pension contributions.
This means that company directors and self-employed people are responsible for saving for their own retirement.
At Four Wealth Management, we are often approached by directors with little or no pension savings who are looking to make large contributions to start their pots.
How much can be contributed to a pension?
Company directors can pay as much into their pension as they like, however your total amount should not exceed the business’s annual income.
What is tax relief on pensions?
It is important to note that pension contributions only receive tax relief up to the annual allowance of £40,000. This allowance includes both employer and employee contributions.
Tax relief on pension contributions is automatically added at the basic tax-payer rate. Additional or higher rate taxpayers need to claim back their tax relief through their annual tax return.
You can contribute more than the annual allowance, but no further tax relief will be received.
What is the ‘carry forward’ allowance?
If you are looking to contribute a significant sum into a pension as a lump sum, you may be able to benefit from the ‘carry forward’ allowance which allows you to utilise any unused pension allowance from the last three years and contribute the current tax year allowance if you have been part of a registered pension scheme during these years. This means you could potentially contribute £160,000 as a lump sum into a pension and receive tax relief.
The Lifetime Allowance
Company Directors should also be aware of the Lifetime Allowance which is the limit on the amount that you can withdraw from your pension without incurring additional tax. The Lifetime Allowance for the 2021/22 tax year is £1,073,100.
Corporate tax relief on directors’ pension contributions
The most financially beneficial way to contribute to a director’s pension is to make the contributions directly from the limited company into the pension. A limited company can save corporation tax on pension contributions which in the 2021/22 tax year is 19%.
Employers also don’t pay National Insurance on pension contributions. The National insurance rate for 2021/22 tax year is 13.8% so by the company contributing directly into the Directors’ pensions they can save up to 38.8% in tax compared to paying the money in the form of a salary.
Pension planning for high-earning directors
At Four Wealth Management, we offer clients a Retirement Account through St. James’s Place.
The Retirement Account offers a great range of investment choices and allows you to withdraw your assets flexibly when required in monthly amounts or a lump sum as and when required.
Find out if a Retirement Account is right for you by booking a no-obligation meeting with one of our financial advisers.
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 is dependent on individual circumstances.
Find the best pension option for limited company directors
If you are a company director and want some help setting up or maximizing your pension benefits, you can book a no-obligation meeting with one of our financial advisers online or by calling us on 0117 973 0500.