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Pensions for company directors – what you need to know

Posted on 30th July 2024
This content will be shown in the summary on the maiAs a company director you’re classed as an employee so you pay National Insurance (NI) on your yearly income and bonuses. There are different rules for tax on dividends.n blog page. Click on this text to edit it. 
If you’re eligible you can receive the state pension, which depends on how many ‘qualifying’ years of NI payments you’ve made. This year a full state pension amounts to a little less than £1,000 per month. It’s a good idea to think about how you would like to live when you retire to decide whether you also need extra savings. 
 
You might not know your business benefits from tax relief if you set up and contribute to a personal pension. It’s a good way to save for your retirement and a tax-efficient way of using your business profits. As well as your business contributions to your director's pension you can also make personal contributions. Pension tax relief is available on both types of contribution. 
 

How much can my business contribute to my pension? 

Your business can contribute up to 100% of your annual income to your pension and receive tax relief. However, this must meet HMRC’s test as a ‘wholly and exclusively’ business expense. 
 
If you would like to contribute a larger amount to your pension the 'carry forward' rule might apply. You can top up your pension contributions if your haven’t used your full allowance in the previous three tax years. To do this you must have been a member of a registered pension scheme during that time. 

How much tax could I save by contributing to a director’s pension? 

The National Insurance rate for 2024/25 is 13.8%. This doesn’t apply to pension contributions paid by your business rather than salary, so you can save up to 13.8%. The amount you pay is deducted from your company’s profits as an 'allowable expense' so it’s not liable for Corporation Tax. 
 
You can also personally contribute £60,000 or 100% of your annual income and receive tax relief. Depending on your earnings, you'll receive tax relief at your highest marginal rate of 20%, 40% or 45%. 
 
If you're a basic rate taxpayer a £100 contribution costs you £80 because the government will add £20. As a higher rate taxpayer, a £100 contribution costs £60 because the government will add £40. This comprises £20 added immediately and £20 you can reclaim in your self-assessment tax return. 

How do I contribute to a director’s pension? 

HMRC will want to know that your total pay and benefits package is 'reasonable' for the work you do as a director. This includes your salary, dividends, bonuses, benefits in kind, and pension contributions. 
 
If you’re the sole company director and main source of your business’s income you’re likely to meet this requirement. However, it’s best to check with HMRC. 
 
Your pension contributions can’t be more than your company's annual profits. If you have employees you also need to make similar pension contributions for them if they do work of similar value. 

Tax-efficient ways to use your business profits 

You can pay dividends to shareholders as long as the business has made enough profit. These payments are discretionary and exempt from National Insurance. Shareholders can each receive up to £1,000 in the tax year before they pay tax. 
 
You could choose a self-invested personal pension (SIPP) with a greater range of investment options. SIPPs are flexible because they allow you to regularly invest and manage your portfolio. 
 
Alternatively, if you have no more than 11 members in your pension scheme you might consider a small, self-administered scheme (SSAS). These allow a small number of senior employees to build up a retirement pot. 
 
Profectus Accounting provides bookkeeping and accounting services for small and large businesses. If you would like to know more about pension contributions from your limited company please get in touch. 
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