What Is A Director Pension? Should I Have One?

Tax Relief On Company Director Pension Contributions

As mentioned, the maximum pension contribution for company directors on which you can get tax relief is a gross payment of £60,000 per year. This includes employer and employee contributions.

Income Tax Relief On Personal Pension Contributions

The maximum a company director can contribute to a pension personally each tax year and still get income tax relief is limited to the lower of £60,000 or 100% of PAYE income. You’ll receive tax relief at your highest marginal rate, so 20%, 40% or 45% depending on your earnings.

This means as a basic rate taxpayer, a £100 gross pension contribution will actually only cost £80, because the government will add £20. As a higher rate taxpayer, a £100 contribution will only cost £60 because the government will add £40, made up of £20 at source and £20 you’ll have to reclaim later via your tax return.

You can calculate your pension tax relief in our handy calculator below.

Corporation Tax Relief On Pension Contributions Directly From Your Limited Company

The PAYE cap can be problematic for company directors, whose PAYE salaries tend to be small and topped up with dividends to help mitigate tax exposure. Here the company can step in to boost pension contributions above the PAYE cap up to the individual’s annual allowance. Typically, corporation tax relief at 19% is available on employer pension contributions.

The cap of 100% of earnings doesn’t apply to company contributions, so your company can contribute up to the full £40,000 regardless of your earnings.

Are Director Pension Contributions An Allowable Business Expense?

Yes, providing the employer contribution passes the ‘wholly and exclusively’ test, meaning the employer pension contribution must be deemed ‘wholly and exclusively’ for the purposes of the employer’s trade or profession.

The first step HMRC will take is to establish whether the level of total remuneration — i.e. salary, dividends, bonuses, benefits in kind, pension contributions etc. — is commercially ‘reasonable’ for the work being done.

Where the individual is a sole company director and the main driving force behind generating the company’s income, the contribution is unlikely to fail this test, but it’s always best to consult your accountant.

Other factors HMRC will examine before allowing pension contributions via your limited company include:

• Checking that pension contributions don’t exceed the company’s annual profits. So, if your company turns a profit of £20,000 in a tax year, £20,000 will likely be the maximum the company can contribute to your pension that year
• Making sure you’re making similar pension contributions to others in your company who are doing work of similar value. For example, you may be one of two directors who each put in 50% of the hours and effort required to drive a company and so you should each be rewarded with similar pension contributions in any given tax year to pass HMRC’s test.

National Insurance Relief On Pension Contributions

As well as getting corporation tax relief on premiums at 19% in the 2023/24 tax year, there’s no employer National Insurance contributions to pay on pension contributions made via a limited company, either.

Depending on your tax position, this may be more tax-efficient than making pension contributions personally, especially if you find yourself limited by how much you can pay into a director pension personally because of the 100% of PAYE earnings rule.

Making Pension Contributions To Reclaim The Personal Allowance

For those with an income of more than £100,000, your personal allowance starts to taper down to zero. The personal allowance is the amount you can earn before you have to start paying income tax.

The income tax personal allowance is £12,570 in the 2024/25 tax year. This means that if you earn more than £125,000 your income tax personal allowance is reduced to zero and you effectively pay 60% tax on the earnings above £100,000.

One way to reduce your tax liability here can be to make an employer pension contribution, which is possible as a dividend receiving director. This can bring your earnings below the £100,000 threshold and potentially therefore reduce your tax bill.

Check with your accountant and / or a financial adviser before making pension contributions with the aim of reducing your tax bill, as this is one area where you definitely don’t want to fall foul of any HMRC rules!

John Spink
Head of Financial Planning at Drewberry

Using Pension Carry Forward To Increase Pension Contributions

If you’re a company director and you haven’t yet made any contributions to your pension but your company has been running for a few years, you have the potential to carry forward unused pension contributions from the previous 3 tax years to the current tax year to boost your pension contributions above the 2023/24 £60,000 limit.

That said, you can carry over any leftover allowance from the previous 3 years, as long as your company:

• Was registered in a UK-based pension during those 3 years
• Made at least as much profit as you want to contribute in the current tax year.

Imagine you set up your company in 2020 and didn’t make any pension contributions in 2020, 2021 or 2022.

That means that in 2023, your limited company could potentially pay in up to £180,000 into your pension, as long as it makes at least £180,000 of profit in that tax year.

Types Of Pension For Company Directors

As a company director, you have access to an array of pension options. These include:

• Stakeholder pensions and group stakeholder pensions
• Self invested personal pensions (SIPPs)
• Small self-administered schemes (SSAS)
• Multi-employer pension schemes (e.g. NEST).

Stakeholder Pensions and Group Stakeholder Pensions

Stakeholder pensions are perhaps the simplest form of personal pension available on the market today. They must meet minimum standards set by the government. These include:

• Capped charges
• Fee-free transfers
• Flexible contributions — allowing you to start and stop contributing as required by your cashflow
• Low minimum contributions — you can typically start a stakeholder pension with no more than £20 and minimum monthly payments are low or non-existent
• A default investment fund to invest your money in if you don’t want to / are unable to choose your own.

Although stakeholder pensions are simple to contribute to understand, this comes at a cost. There’s a limit on the types of investments that can be held in a stakeholder pension, so you have limited investment choice compared to some of the other types of pension on the market.

However, if you’re looking for a simple pension that you and your company can contribute to with low charges and a default investment fund, a stakeholder pension could be the best option.

Given that these pensions are relatively simple, you can set up a stakeholder pension yourself in a number of ways, including online. Alternatively, you can use a financial adviser.

Group stakeholder pensions

Group stakeholder pensions are a collection of stakeholder pensions sometimes offered by companies to individual employees. Each employee still gets their own individual stakeholder pension, but they’re administered by a group. This is useful if you’re a company director who wants to set up a pension for yourself and your employees, as you must do under the auto-enrolment rules.

Self-Invested Personal Pensions

A self-invested personal pension (SIPP) offers access to a wider array of funds and investments than a stakeholder pension. You also tend to be more ‘hands on’ with a SIPP, choosing where you want to invest your retirement savings.

These pensions are usually for more sophisticated investors who have experience with investing as there’ll be a wide variety of assets and funds you can opt to invest in, such as:

• Unit and investment trusts
• Government securities
• Insurance company funds
• Traded endowment policies
• Some National Savings and Investment products
• Deposit accounts with banks and building societies
• Commercial property (such as offices, shops or factory premises)
• Individual stocks and shares quoted on a recognised UK or overseas stock exchange.

SIPPs usually have higher charges than stakeholder pensions to reflect the fact that they’re more complicated. Higher charges are also due to the fact that you have access to a wider array of investments.

Small Self-Administered Pension Schemes

A small self-administered scheme (SSAS) is usually set up to provide retirement benefits for one or more company directors and key staff. Typically, the number of employees covered by a SSAS is no more than 11.

While the tax rules surrounding an SSAS are similar to a SIPP insofar as tax relief on director pension contributions is concerned, the other rules surrounding investments and management of the pension are very different.

An SSAS requires far more in the way of management and administration compared to a SIPP.

With a SIPP the trustees and scheme administrators are generally one in the same — the provider of the SIPP. An SSAS, on the other hand, requires trustees to administer the scheme, with this duty typically falling to members.

As a trustee/scheme administrator of a pension plan, you must:

• Register with The Pensions Regulator and put together regular scheme returns (unless you’re the sole member of the scheme)
• Make sure the pension is registered with HMRC and provide all required returns of information to HMRC
• Operate tax relief on contributions under the relief at source system
• Report events relating to the scheme and the scheme administrator to HMRC
• Provide information to scheme members, and others, regarding the lifetime allowance, benefits and transfers
• Pay certain tax charges if the need arises.

As you can see, there’s a lot more work involved in setting up, managing and administering an SSAS compared to a SIPP.

However, while there’s more effort required with a small self-administered pension scheme, there are also some benefits open to any company administering an SSAS.

Benefits Of A Small Self-Administered Scheme

Compared to a SIPP, small self-administered pension schemes have some advantages to directors and their limited companies that you may look to take advantage of.

Subject to certain conditions, SSASs can lend money to sponsoring employers (i.e. your limited company), whereas SIPPs are forbidden from making loans to any members or person / business connected to a member.

An SSAS can also use up to 5% of its fund to buy shares in the sponsoring employer, technically allowing the pension scheme to own 100% of your company’s shares providing this does not exceed 5% of the total fund.

This allows an SSAS to invest in the company. In comparison, with a SIPP you can’t invest in any company controlled by a SIPP member or an associated person, as this is regarded as investing in ‘taxable property’ and incurs charges.

Small self-administered pension schemes are far more complicated than a stakeholder pension or even a SIPP.

If you want to take advantage of any of the above benefits, it’s vital that you seek professional advice to avoid any problems further down the road.

Jonathan Cooper
Senior Paraplanner at Drewberry

Multi-Employer Pension Schemes

Since the introduction of auto-enrolment, it’s become mandatory for anyone employing people — even one person — to provide some form of pension for those workers.

This could be a workplace pension, which would be provided for workers by just one employer. However, multi-employer pension schemes exist to make it easier to offer pensions for employees and provide pensions to multiple different employers. The biggest and best-known of these is the National Employment and Savings Trust (NEST).

As a company director, if you employ people you have a duty to provide them with pensions. You can use NEST to provide these pensions if you wish, or you may wish to set up your own occupational scheme.

Solo company directors who employ no other people don’t have to provide themselves with a pension, but can choose to do so if they want. Providing you don’t employ any other people, you can get a pension as a self-employed director via NEST.

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