Pensions

Pensions are a huge topic that we can only cover as an overview. However please note we are not financial or pension advisers and we strongly recommend you speak to a pension adviser to discuss your own personal requirements. We are happy to arrange an introduction to a pensions adviser for you if appropriate.

Personal contributions

Personal pension contributions are paid into a pension scheme by you personally. Any such payments are usually ‘grossed up’ by 20%. This means if you pay £80 into the pension fund it is treated as though you had paid £100 – the £20 is added to your pension fund by the government.

If you are a higher rate tax payer you will also save an additional 20% tax through your personal tax return.

With a personal pension fund you are unable to pay in any more than your 'relevant earnings' for the year. Broadly speaking, earnings include your salary but not any dividends. So for most small limited company directors this will be limited to the low rate of salary taken from the company (see section 4.1 for more details).

Employer contributions

Employer pension contributions are paid directly to the pension provider from the company’s bank account and the pension scheme must be set up as a company scheme. This means that the amount paid in by the company is the amount which goes in to your pension – there is no ‘grossing up’ as with a personal pension.

Any pension contributions paid by the company will be allowable for a corporation tax saving which will dependent upon the level of profits within the company. (19% or 25% for 2024/25)

HMRC will also review any pension contributions made on behalf of employees and directors to ensure these are not excessive in terms of the role being performed. So for example, if a director has a salary of £9,100 and pension contributions of £30,000, then HMRC will consider the total remuneration to be £39,100 and will decide whether this is excessive.

This may become a contentious issue if pension contributions are made for directors who are paid a salary but don’t work full-time in the business – for example a spouse. It is best to keep these contributions at a lower level to avoid an HMRC challenge.

Issues to consider when deciding if contributions are excessive are as follows:

How much would you have to pay someone to do your role
What is your level of experience and how senior is your role
How many hours do you work i.e. how full time is your role
Is the company making sufficient profits to support the level of contributions

Limits:

The total maximum gross pension contribution (company and personal) per person is £60,000 per year for the 2024/25 tax year (£60,000 2023/24). However, tax relief on pension contributions will be restricted to a minimum of £10,000 if your threshold and adjusted income limits are in excess of £200,000 and £260,000 respectively..

You might also have un-used allowances from previous years that you can bring forward to increase this limit (check with your pension advisor).

There was previously also a lifetime limit which was set at £1,073,100 for the 2022/23 tax year, however this has now been removed from the 2023/24 tax year. This could change though after the General Election.

So to summarise:

Your company can make pension contributions for you - the yearly limit on this is up to £60,000 and you may be able to contribute more if you have unused allowance from prior years.
It MUST be the company who makes the payment - you cannot make a payment yourself and then have the company reimburse you.
The amount of pension you pay isn’t related to the profit made by the company – and you could actually make a payment which puts the company into a loss position. However you will need to ensure you leave enough cash in the company to pay any corporation tax on that year's profits!
HMRC will look at whether the overall remuneration you've received from the company (salary plus dividend) is reasonable given the services you're providing so tread carefully when making contributions on behalf of directors who don't work full time in the business!
If you haven't made excessive contributions in prior years, it's more likely that HMRC will accept a contribution in the current year.