Business owners need to find the right mix of pension contributions

Need to consider whether to make personal or employer contributions to boost pension pot

There are so many challenges when it comes to pensions, particularly if you are the owner of a limited company, where the owner or director is the only employee.

In this situation the owner/ director can choose to make pension contributions either personally or via the company.

They will draw an income, normally broken into an element of PAYE remuneration and dividend payments.

Pension contributions paid personally attract basic rate tax relief at source, increasing the value of the contribution. Higher/additional rate tax is claimed via self-assessment.

Whilst higher rates of tax relief can be obtained on personal contributions, individuals withdrawing a smaller salary will be limited in the amount they can contribute.

An individual can make a contribution of up to 100% of their relevant earnings, subject to their available annual allowance for tax relief. Relevant earnings include salary but not dividends.

Rather than draw extra income to pay a personal contribution, another option is for contributions to be paid by the company.

Company contributions are not limited by the individual’s relevant earnings but must meet the “wholly and exclusively” rules ensuring that the pension remuneration is appropriate to that individual.

The individual’s available annual allowance needs to be considered. Company contributions are a taxrelievable expense resulting in a reduction in corporation tax.

Unlike a personal contribution, no individual tax relief is added to the contribution.

Pension contributions provide a taxefficient method of extracting money from a company, with no tax or national insurance liabilities on the money paid to the pension.

There are benefits of making both personal and company contributions and the optimal method would be to make a combination of both, if possible.

In reality it will depend on the individual’s financial needs and business profits.

However, in a lot of cases making employer contributions works best for many business owner and directors.

Make the most of tax advantages offered by pensions.

Ricky Clark.