You’ve probably heard people saying that contributing to a pension is a tax-efficient approach to extracting money out of the company. If you’re not sure what this means or are looking for an introduction to saving for your retirement, you’re in the right place!
In this Beginners’ Guide to Pensions, we’ll briefly run through the three different ways you can add to your pension, covering the tax implications and admin involved with each option.
1) Personal pension contributions
This involves taking money out of your company, paying personal tax and then contributing your personal funds into a Self-Invested Personal Pension (SIPP). Your pension fund then reclaims the basic rate tax on your behalf from HMRC and uses it to top up your contribution.
In this situation, you will only receive basic rate tax relief. If you are a higher/additional rate taxpayer, you need to add your personal pension contributions to your Self Assessment to claim the additional tax relief. Although personal pension contributions are better than no contributions, this option is admin-heavy and offers no additional tax savings.
It’s also worth noting that personal pension contributions are restricted by your ‘relevant earnings’, typically your salary. This means you cannot add more to your pension than your annual salary. For a contractor, a typical salary is often around £12,500. Find out why in our information on salary and dividend recommendations.
2) Employee’s pension contributions
For this option, payments to your pension form part of your remuneration package and are recorded in your payslip. Your company receives Corporation Tax savings on the full amount of the contribution.
To set this up, your company (or you as a director) needs to arrange a workplace pension and enrol you in the scheme. Using this option means your payroll will become more complex. In addition, if you change your pension contributions monthly or even quarterly, this could add even more admin and may increase your accountancy fees.
3) Employer’s pension contributions
This is Maslins’ top choice for pension contributions. Payments are still part of your remuneration package but there is no need to add these contributions to your payslip each month. The employer pension contributions are not linked to relevant earnings (for most of our clients this will be their salaried income). Plus, your company makes Corporation Tax savings, just like any other business expense.
So, all the benefits of having a SIPP and none of the admin heavy lifting. You can read more information in our pensions and the annual allowance article.
Still have questions? Our team of Chartered Tax Advisers on hand to offer help. Just fire them across to us and we’ll help untangle the jargon.
