Move quickly to get the most out of paying into your pension
If you’re a director of a limited company, a company pension is an incredibly tax-efficient way of moving money from being company money, to being personal money.
Making sure you pay in the maximum you can each tax year is important. With just weeks to go until the end of the tax year, Leeds-based Tudor Financial Services’ pensions expert James Jackson tells us why.
Making your money work harder
We all know we should be saving for retirement. But paying into a company pension if you’re a company director has even more benefits than just providing for old age.
Company pension contributions are a legitimate expense, so they come off company profits, reducing your Corporation Tax bill.
If you pay that money into a pension as company contribution instead, not only is there no tax to pay but you’ve got the double benefit of reducing your Corporation Tax bill.
And as the company doesn’t have to pay National Insurance on pension contributions, currently 13.8%, this is another saving versus taking the same money out as salary.
Although you can’t access the money until you’re at least 55, what you have done is successfully personalised money from your business.
Maximum pension contributions
There are limits to what company directors can pay personally into their pensions and still receive tax relief, currently that’s £40,000 or 100% of your taxable income, whichever is lower.
The most tax efficient way of contributing is via a company contribution, but there is also tax relief on personal contributions, linked to the rate of personal tax you normally pay.
Regardless of whether the contribution is from the company or you personally, payments can be a nominal amount on a monthly basis, topped up by a lump sum contribution as profits allow, or can be simply a fixed monthly amount.
Do bear in mind there is a lifetime allowance, currently £1,073,100, which is the maximum amount you can draw from a pension without paying extra tax.
Pensions carry forward rules explained
If you’ve had a good year and have profits you want to invest, there is way you could contribute more to your pension if you haven’t put the maximum in previously.
Known as the carry forward rule, you can use any remaining allowance from the previous three tax years, as long as you’ve had a pension during this time.
So if your income is £40,000 and you only contributed £20,000 in 2018/19, £20,000 in 2019/20 and £30,000 in 2020/21, you could contribute an extra £50,000 to your pension before 5 April 2022, in addition to the £40,000 from this year’s allowance.
Get advice to make the right choice
As you can see, the opportunities to make your money work harder using pensions are great, but it’s imperative you get the right advice for your situation from an expert. Here at Tudor Financial Services, we advise people from across Leeds and the surrounding areas on how to make their money work harder for them.
To book a free initial chat, give our friendly team a call today.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
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