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Company Director Pensions

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Company Director Pensions

A conversation about company director pensions, with David Stirling.

What is a Company Director pension?

A company director pension is a special arrangement for business owners. Basically, it means they can pay into their pension from their own company as a legitimate business expense. It’s a very tax efficient route for a business owner to take money from their business because they also receive corporation tax relief on it as an allowable expense.

It’s a double bonus for business owners because they’re getting money for their future, and also getting corporation tax relief – so it’s definitely worth considering for company directors.

What’s the difference between a personal and company director pension?

A personal pension is usually paid from someone’s own income – either their post tax income or an employer contribution. A company director pension is actually paid from the company funds – and that therefore makes it more tax efficient for the business owner, because it’s not coming from their own personal income.

How do pension schemes for directors of limited companies work?

It’s set up the same way as any pension scheme, in the director’s name. But instead of the director paying the premiums, the limited company makes the contributions. They come directly from the business into the pension company.

Can a company make pension contributions for a director?

Yes, as we just touched on, the company makes the contributions and then claims these back as a business expense against business profits.

That reduces the overall profit for taxation, plus you also get a corporation tax uplift. Currently, that’s 19%. So for £1,000 that goes into the pension. It only costs the business £810 – so it’s very tax efficient.

How much can a company pay into a director’s pension?

The current limit has been increased this year to £60,000 from £40,000 [episode recorded in June 2023]. So you can pay a maximum of £60,000 per year into any pension, without penalty.

Clearly, there needs to be profit within the business to allow this to happen. There are quite lengthy criteria around this, so you would need to really speak to an advisor for specific details.

How can I maximise pension returns as a high earning company director?

Obviously you can put your £60,000 from the business into the pension each year – although we always need to consider current legislation when doing that. HMRC can and do change the rules.

Again, you would need to speak to an advisor to work out how much to pay in, as well as your attitude to risk and what kind of funds you want to put your money into. If you can afford to contribute £60,000 per year, do we put that into a volatile fund or something more safe?

That’s all part of the discovery meeting with each client, where we work out what your attitude to risk is and your appetite for volatility. To maximise pension returns, you would need to take some kind of risk, so we would need to match that up.

Do I need a pension if I’m a self-employed limited company director?

No, not necessarily. But self-employed company directors are usually in a situation where they can use these tax advantages and set their pension up this way. So it is something that they should definitely consider.

But there are other factors as well: your age, the profits of the business, your goals and priorities. When do you want to retire? Can you afford to put the money in? An advisor will help you make an informed decision.

Do company directors need a pension?

No, not necessarily. But again it’s a good way to take money out of the business and ring fence it for your future. So it’s definitely worth considering.

Are director pension contributions tax efficient?

If your income falls into higher tax bands, you can use profits from your company as pension contributions instead of your income. That then has the effect of reducing your personal income tax liability, and potentially reducing any corporation tax liability in the business.

Again, it’s potentially a double bonus, but you would need an advisor to work alongside your accountant to work out the best way to do that.

How can Mint Wealth help me with a company director pension?

As financial advisors we would work alongside your accountant to decide how best to make contributions into your pension. We would then set up the pension and invest it into funds that align with the client’s risk profile and their goals for the future.

This would be reviewed very regularly just to make sure everything’s on track, usually on an annual basis. You can change the amount that’s put into the pension. You can put a lump sum in, you can make regular payments… so there is quite a lot to consider. But it’s definitely something that company directors should be looking at.

The value of pensions & investments and any income from them can fall as well as rise. You may not get back the amount originally invested..

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