What is the best pension
for limited company directors?

If you run your own limited company then you don’t have an employer taking care of your pension – you are the employer! As with most parts of being self-employed, the onus is on you to take care of your pension. This is why, as director of your company, it is essential that you take the time to set up a director’s pension. Doing so means that you can make contributions to your pension pot both as an individual and simultaneously contribute via your limited company. This in turn means that you will be able to claim pension tax relief twice – once as an individual on your individual contributions and once on the contributions that you make through your business.

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How to make sure you have the best pension

Are Director Pension Contributions Tax Efficient?

Absolutely, yes. A director’s pension isn’t only about saving for retirement, it’s also a tax efficient way of extracting profits from the business. As director of your own limited company you are able to make contributions to a company director’s pension both as a business and as an individual, or as ‘employer’ and ‘employee.’ This is of course subject to the pension annual allowance which means you can only get tax relief on contributions up to either £40,000 or 100% of your salary, (whichever is lower) and there is no going over this, regardless of whether the contributions are ‘employee’ or ‘employer.’ That figure however, tapers down for anyone who earns over £150,000, by £1 in every £2 they earn. This tapering is capped at £30,000 which in turn means that anyone who earns over £210,000 would only have an annual allowance of £10,000.
Individuals are only allowed to contribute up to 100% of their salary, but many company directors will only take a small salary. Because dividends cannot be counted as salary when it comes to increasing contributions to a pension, most company directors will instead make up the lion share of their pension contributions via the limited company.

How Much Tax Relief is Available on Pension Contributions from Limited Companies?

A company director can make personal contributions to a pension every year up to £40,000 or 100% of their PAYE income, (whichever is lower,) and that tax relief will be at their highest marginal rate of 20%, 40% or 50% depending on how much they earn. Consequently, if they were a basic rate taxpayer then if they made a £200 pension contribution it would actually only cost them £160 because the government would add £40. For a higher rate taxpayer, that £200 pension contribution would only cost £120 because the government would add £80 (£40 at source and £40 to be claimed later on a tax return.)

Does It Make More Sense to Contribute via the Limited Company compared to Personal Contributions ?

Actually it does. Because the PAYE cap is sometimes a problem for company directors (who prefer to pay themselves a smaller salary and then take dividends) it is useful for the limited company to take up the slack and boost their pension contributions over that PAYE cap so that they can take full advantage of their annual allowance. Corporation tax relief of 19% is allowed on ‘employer’ contributions and that 100% earnings cap is not applied to limited company contributions, meaning company directors can contribute the maximum £40,000 irrespective of what they are paying themselves as a salary. On top of this there is the added bonus of relief on National Insurance.

Can I Make Savings with National Insurance As Well?

Yes, you can! In addition to the 19% corporation tax relief on premiums there will also be no employer NI contributions to make on any limited pension contributions you make via your limited company. Employer NI contributions are set at 13.8% so every time you make pension contributions via your limited company you are making a saving of 19% corporation tax + 13.8 NI contributions for a massive savings of 34.8%. This is yet another reason to pay into your pension via your limited company rather than through personal contributions.

Do pension contributions count as a Business Expense?

More good news there too – director pension contributions qualify as allowable business expenses so long as they can pass the ‘wholly and exclusively’ test, in that the contribution must be seen to be ‘wholly and exclusively’ for the purposes of their profession or trade. How is this judged? The main thing HMRC will check is if the level of remuneration through the company (including the salary, bonuses, dividends etc) seems reasonable for the work that is being supplied by the company. Additionally, they will check that the contributions to the pension scheme are not in excess of your company’s yearly profits – if your company only makes £30,000 in a single tax year, they would probably view £30,000 as the maximum you were allowed to contribute to your pension fund in that particular year. Lastly, they may want to check that your contributions to your pension are of a similar amount to anyone else in your company who does similar work to you. So, if you have a company with two directors who both do the same amount of work and hours and have the same responsibilities then both should have similar sized pension contributions in order to ensure that they pass the test set out by HMRC. If, however you are the sole company director and the sole person bringing in the company’s income then your contributions will most likely be fine and pass the text. That being said, it is always worth sitting down and checking with your financial advisor or accountant before you make very large employer pension contributions.

Am I Allowed to Carry Forward Pension Contributions from Previous Years?

You are allowed to do this and go back 3 years, as long as your company was registered in a pension scheme for those 3 years. If your company was registered with a scheme but you did not make contributions throughout those 3 years, then you are allowed to ‘carry forward’ those unused pension contributions. This means that your allowance for the current year would be as much as £40,000 + (3x£40,000) = £160,000. However, your company must make as much in profit in the current year as you wish to contribute towards the pension. So, if you set up a company in 2017 but didn’t put any money in the pension fund in 2017, 2018 and 2019, in 2020 your company would be permitted to pay in as much as £160,000 (4 x £40,000 limit) but only as long as it has made a minimum of £160,000 in profit in 2020.

Can I Use Director Pension Contributions to Bring Down My Personal Allowance?

Possibly, yes. The personal allowance (the amount you are able to earn before you start having to pay income tax) is currently set at £12,500. However, as anyone who is lucky enough to earn over £100,000 will know, any income over that £100,000 threshold means your personal allowance starts to taper and eventually goes down to zero. If you earn over £125,000 then your personal allowance will be reduced to zero and you are then basically paying 60% tax on all your earnings above £100,000.
One possible way to counteract this is via an employer pension contribution which can of course bring your earnings down below that £100,000 threshold and help reduce your tax liability.

Company Director Pensions – Which Type Is Right for You?

Once you have made the decision to go ahead with a company director pension the next step is choosing from a wide range of different pension schemes, including stakeholder pensions and group stakeholder pensions, multi-employer pension schemes, self-invested personal pensions (SIPPS) and small self-administered schemes (SSAS.) In this section we’ll take a look at a few of these:

Stakeholder pensions 

The most common and most basic form of personal pension that there is on the market. Stakeholder pensions, though basic, have to meet certain minimum standards that have been set down by the government. These standards include:

(1)   No fee transfers.
(2)   Capped charges.
(3)   Low minimum contributions (often as low as £20.)
(4)   Flexible contributions (meaning you can contribute as and when you can afford to.)
(5)   A default investment fund.

This ease of use and bare bones approach does however have disadvantages too. Stakeholder pensions cannot invest anywhere – they are limited to certain types of investment whereas other pensions can invest in a much wider range of markets / products. That being said, if you aren’t looking for anything too technical or labour intensive, stakeholder pensions are worth considering – they allow your company to contribute to a pension without having to pay large fees, they are easy to set up and most people can do it themselves, although as ever, talking to a financial advisor is always worth doing first.

Group stakeholder pensions

With group stakeholder pensions, each employee of a company would get their own stakeholder pension, but these individual stakeholder pensions are then administered together by a group. This allows a company director to set up a pension for themselves and their employees as they are required to do under auto-enrolment regulations.

SIPPS (Self-Invested Personal Pensions)

Self-invested pensions (or SIPPS) are pensions which offer you a much broader selection of investments and funds than the basic stakeholder pension. They are more sophisticated, offer more choice and involve more of your time as you will be a bit more involved in choosing where to invest your retirement funds. The reason they are considered to be more complex or sophisticated is that they present you with a wide range of funds and assets from which to choose, including government securities, unit and investment trusts, traded endowment policies, National Savings and Investment products, deposit accounts, insurance company funds, individual shares and stocks traded both on the UK and foreign exchanges and commercial property. Also, because they are more complicated and access more investments, they invariably have higher charges than stakeholder pensions too. There are different kinds of SIPP however and though full SIPP’s are more expensive and more complex, the more basic SIPP’s are certainly manageable for anyone with some investment experience.

SSAS (Small Self-Administered Pension Schemes)

An SSAS pension is at heart simply another kind of defined contribution pension scheme. Unlike other defined contribution schemes, an SSAS must be set up via a trust and it must have less than 12 members. A small self-administered scheme will usually be set up by the directors of a limited company on behalf of themselves and a small number of specified employees. Because SSAS pensions are popular in family businesses, these specified employees will often be family members. It is also possible to add outside family members to an SSAS even if they are not employees, the aim being to give family members a share in the assets and pension of the business. This is why an SSAS is often thought of as a ‘family pension.’
Small self-administered pension schemes require a lot more management and while with a SIPP it is usually the SIPP provider who provides the trustees and scheme administrators, with an SSAS the scheme must be administered by trustees and these are usually taken from the members of the scheme. What does this involve? If you become a trustee administrator of an SSAS you are responsible for (1) registering the scheme with the pensions regulator (2) taking care of the regular scheme returns (3) registering the scheme with HMRC (4) taking care of keeping HMRC up to date with information about the scheme (5) sort out the tax relief for contributions (6) keep members up to date with everything they need to know about the scheme’s benefits, transfers and lifetime allowance (7) pay any tax charges which come along. Whilst this is almost certainly a lot more work, it does come with a lot of benefits too. For example, SSAS’s are able to lend money back to their sponsoring employers (which for directors would be their own limited companies) and are also allowed to use as much as 5% of the fund to purchase shares in the sponsoring employer’s company, which would mean that the pension fund could own some or all of the company! The fund can own up to 100% of the company as long as doing so does not cost more than that 5% of the fund’s assets.

Multi-Employer Pension Schemes

Ever since the government introduced auto-enrolment, companies and company directors have been required to put in place some kind of pension scheme for their employees. Often employers will put in place workplace pensions which are there solely for their employees, but if they don’t want to do this they can also use what are known as multi-employer pension schemes which are designed to make it much easier to offer employees a pension. Basically, they provide pensions for employees of a number of different companies and employers. The largest of these multi-employer pension schemes is provided by the National Employment and Savings Trust (often referred to as NEST.) As a company director, if you want to provide your employees with a pension but don’t wish to set up an occupational scheme then you could use NEST to provide their pensions for you. If you are a company director with no staff, you could also get a pension with NEST yourself.

Take control Of your Pension & Future with a Small Self Administered Scheme (SSAS) Pension.

Do you want a Pension that allows you to
Invest in property
Invest in private companies
Lend money to your Limited company
Pool pension pots

If you want to manage your pension like you manage your business then you need to speak to us about SSAS pension.

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