Company or Personal Pension Contributions?

If you own your business you probably know that it’s usually good tax planning to pay profits into your pension fund.

If you’ve got personal cash surplus to requirements, and you’re a higher rate tax payer, a personal pension contribution might be the best route for you.

But in our experience, many business owners have more cash in their business than their personal accounts.

And they’re usually paying themselves a low salary and topping up their income with dividends.

Dividend Income isn’t Pensionable

As explained in our popular article Dividends and Pensions personal pension contributions are limited to 100% of salary and you can’t take dividends into account.

The company on the other hand, can pay a pension contribution that is more than your salary, you just need to make sure that you stay within your Annual Allowance.

The Annual Allowance is £40,000 for the 2020/21 tax year ending 5th April 2021.

Unlike salary, pension contributions are exempt from employer (13.8%) and employee (12%) National Insurance.

And, they’re not a taxable benefit.

Standard Annual Allowance

If your total income is over £200,000 you need to check you qualify for the full Standard Annual Allowance.

You might be subject to the Tapered Annual Allowance. That could reduce your annual allowance to as little as £4,000 in the current tax year.

If you’ve taken benefits already, the Money Purchase Annual Allowance could also apply and would reduce your maximum contribution to £4,000.

Carry Forward

In some circumstances it might be possible to use the carry forward unused allowance. This which would enable your company contribution to be higher than the standard Annual Allowance.

Corporation Tax Relief

Your company pension contribution will usually qualify as an allowable business expense, which means you can set it against your profits and get corporation tax relief.

To qualify for relief, the contribution must be accepted by HMRC (HM Revenue & Customs) as ‘wholly and exclusively’ for the purpose of the business. Not simply for tax savings.

If you are unsure check with your accountant.

More Reading

Does the tapered annual allowance apply to me?

What is Carry forward?



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Risk Warnings

This article and the information on this website is not personal advice. It’s only intended to give you a brief summary or highlight a particular issue for you to investigate further. It is based on our current understanding of legislation and HMRC guidance which can change and is correct as of the date of the post.

If you’re in any doubt whether a particular course of action is suitable for your circumstances, you should seek professional advice. Tax rules can change and any benefits depend on individual circumstances. And, if you are unsure any reliefs are applicable to you, you should consult your accountant or HMRC.

The value of investments and any income from them can fall as well as rise, so you could get back less that you put in. Past performance is not a guide to the future. It cannot provide a guarantee of the future returns of a fund.

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