Making company contributions to the business owner's private or company pension scheme can be a tax efficient way to extract further value from a business. However, certain annual limits apply to cap contribution levels.
HOW MUCH CAN BE PAID IN?
The maximum annual amount that can be contributed with no income tax or national insurance, but a full corporation tax deduction is £60,000. The annual allowance applies across all pension schemes it is not a 'per scheme' allowance.
If you earn over £260,000, you are likely to have a restricted annual allowance. The allowance is reduced by £1 for every £2 in annual earnings above this figure, with the minimum allowance set at £10,000. Once the annual allowance is used, you will be charged at your rate of tax for your excess pension contributions.
Where this maximum is unused in a particular tax year, the balance may be carried forward by up to three years (£40,000 for previous tax years) and added to the annual allowance for the relevant year. As an example, if you have not previously contributed, the business could put up to £180,000 as a one-off contribution, receiving a full corporation tax deduction and with no income tax or national insurance.
The amount you can pay in is not limited to what you earn – for example even if your salary is £8,840, the business could put £60,000 into your pension, or up to £180k if the 'carry forward' option is available. This is provided you were a member of a registered pension scheme in those previous years. If you contribute to your pension personally from your gross pay, your tax relief is limited to how much you earnt that particular year.
If you contribute in excess of your annual allowance or accumulated annual allowances if you are carrying them forward, you will trigger a tax charge called the annual allowance charge. It is added to your taxable income and taxed at your rate of tax (20, 40 or 45%). It is effectively reclaiming the tax benefit incurred on the excess contribution. If the charge is over £2k, you can speak to your pension provider to see if the pension can pay the charge from the fund. The company on the other hand is not subject to any penalties and can still claim a corporation tax deduction on the full amount.
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