I’m sure you’re aware that one of the key advantages of paying into a pension, as a director, is the generous tax relief available if you do it in the right way.
For example, contributions made by your company, rather than you personally, are typically the most tax-efficient option.
These contributions are treated as an allowable business expense, meaning they can reduce your Corporation Tax bill too.
For example, if your company paid £40,000 into your pension scheme, not only would it reduce your taxable profit by the same amount, but it would not attract National Insurance contributions (NICs) for either you or the company.
Compare this to taking the same amount as salary or dividends, which would likely result in a much higher tax liability.
It’s worth noting that there’s an annual allowance of £60,000 for pension contributions (as of 2024/25) and exceeding this can lead to tax charges.
However, if you haven’t used up your allowances from the previous three years, you may be able to carry these forward, making larger contributions without exceeding the limit.
Should you pay personally or through your company?
While company contributions are typically the most tax-efficient, there are cases where personal contributions might make sense too.
For example:
- Topping up your allowance: If your company isn’t in a position to make large contributions, personal payments can help you make up the shortfall.
- Maximising higher-rate relief: Personal contributions can reduce your taxable income, potentially moving you into a lower tax bracket. This is particularly useful if you’re on the cusp of paying higher or additional rate tax.
It’s worth discussing this with your accountant and/or a tax adviser who can work out whether this is your best course of action.
Choosing the right pension scheme
Luckily for you, as a director, you have more flexibility than many employees when it comes to selecting a pension scheme.
The most common options include:
- Self-Invested Personal Pensions (SIPPs): These provide a high degree of control, allowing you to invest in a wide range of assets, including commercial property, which might align with your business interests.
- Workplace pensions: If you’re running an auto-enrolment scheme for your staff, you can include yourself in the same scheme. While these are often less flexible, they’re simple to manage and can still be highly tax efficient.
- Defined benefit schemes: If you’ve previously worked in the public sector or for a large company, consider how these older schemes fit into your overall retirement strategy.
Again, the pension scheme you choose can have an impact on your retirement and future plans, so you should speak to an expert for help.
Equally, while pensions are an excellent way to save for the future, it’s important to avoid over-reliance on them.
Diversifying your investments can give you greater flexibility and ensure you’re not caught out by changes in pension legislation.
Here are a few other points to bear in mind:
- Liquidity and accessibility: Pensions generally can’t be accessed until you reach the age of 55 (57 from 2028), so ensure you have other accessible savings for short-term needs or emergencies.
- Succession planning: Pensions are not currently considered to be part of your estate for Inheritance Tax (IHT) purposes which can make them a powerful tool for passing wealth to your beneficiaries tax-free. However, beginning in 2027, this will no longer be the case.
- Personal goals and lifestyle: Consider your desired retirement age, the lifestyle you want, and how much income you’ll need. A good financial adviser can help you calculate this and create a strategy to achieve it.
Generally, we suggest that clients work backwards from their ideal retirement age and then plan accordingly for the remaining working years.
My final thoughts
As a director, you’re in a unique position to structure your pension contributions in a way that maximises tax efficiency and aligns with your broader financial goals.
Whether you choose to contribute through your company, personally, or a combination of both, planning ahead is crucial.
If you’re unsure about the best approach, seeking professional advice from an accountant or tax adviser is a wise move.
Not only can we help you navigate the complexities of pensions, but we can also ensure your strategy is tailored to your business and personal circumstances.
