Pension contributions

We get asked from time to time whether small business owners should make personal pension contributions personally or via their limited company. So here’s our take on the situation, assuming that most small business owners pay only a modest salary and the rest of their income is extracted as dividends (this is generally the most tax efficient route).

If you pay into your pension personally, it is possible that you will get personal tax relief, at 20%. However, if you do what a lot of people do and pay yourself a salary of approx. £5,400 pa only, you may have no personal tax liability (check with your accountant) in which case you will miss out on this tax relief. Also, pension contributions are not deductible against National Insurance contributions. This means that you have to pay 11% of your income in NI and your employer (which is your company so ultimately your cost as well) also has to pay NI at 12.8%, meaning 23.8% going to the Chancellor.

If your company paid the pension contribution instead, this NI wouldn’t be payable but you would still get tax relief (at a slightly increased 21%, the current company tax rates) so you’re saving nearly 25% of your money by doing it this way.

Enough said…?


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