Should I pay into a personal pension or should my company pay my pension instead?

by Gavin Hooker

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This question has been asked a few times recently by company directors looking to manage their remuneration in the most tax efficient way. However, there is no straight forward answer to this question as there are various circumstances to consider. 

In this blog we will look at the effect of a pension contribution from you as an individual and from your company as an alternative.

Personal contribution

If you are a higher rate tax payer, it might be a good idea to make a personal pension contribution, as more of your income would be taxed at a lower rate. So not only do you save tax now but also you save towards your pension for future years - win win!

But how does this work I hear you ask? Well let’s use some figures to explain.

Say you earn £75,000 in a tax year - £12,570 as a salary with the rest being paid as dividends:

  • Without a personal pension contribution:
 

£

Earnings

75,000

Personal allowance

(12,570)

Earnings liable to tax

62,430

Tax @ 0% (£2,000)

0

Tax @ 7.5% (£35,700)

2,677.50

Tax @ 32.5% ((£62,430 - £37,700) = £24,730)

8,037.25

Total tax

10,714.75

  • With a £10,000 personal pension contribution:
 

£

Earnings

75,000

Personal allowance

(12,570)

Earnings liable to tax

62,430

Tax @ 0% (£2,000)

0

Tax @ 7.5% (£45,700)

3,427.50

Tax @ 32.5% ((£62,430 - £47,700) = £14,730)

4,787.25

Total tax

8,214.75

So, the tax saving of personally paying into your pension scheme would be £2,500 based on the example above.

One thing to be aware of, however, is that there is an annual pension allowance of £40,000 (or 100% of your annual earnings whichever is lower) each year. This means that you cannot pay more than this into a pension scheme in any tax year.

Company contribution

As a company director your company can pay into your pension up to £40,000 each year (and if you do not use this allowance, it carries over to the next year).

With the company paying into your pension scheme, it will receive Corporation Tax relief on the contribution. There will not be any personal tax benefits under this method as the company will get the benefit instead. If you are a basic rate taxpayer but your company is fairly profitable, and you want to look to save tax in the company, then this way of contributing may work for you...

Let’s say that your company makes £100,000 as a profit before tax:

  • No pension contribution:
 

£

Profit before tax

100,000

Tax @ 19%

(19,000)

Profit after tax

81,000

  • £40,000 pension contribution:
 

£

Profit before pension

100,000

Pension contribution

(40,000)

Profit before tax

60,000

Tax @ 19%

(11,400)

Profit after tax

48,600

The current tax saving for the company by paying into a pension scheme would be £7,600 based upon a £40,000 contribution!

Despite the company saving more tax by making a pension contribution there would be less distributable reserves. So, if you are unsure as to whether you want your company to pay into your pension scheme it depends on whether you want the cash now (via distributions from your company which would then be liable to personal tax) or later (through a pension payment).

As mentioned above, the answer to whether to pay into your pension scheme personally or get your company to do so is not straight-forward and you should seek advice on what remuneration plan works best for you and your company. This is something that we can help you with, so please do reach out to us for assistance!

The content in this blog is correct as at 11 May 2021.