If you have your own limited company there are two ways that you can make pension contributions.
PERSONAL PENSION CONTRIBUTIONS
You can make personal pension contributions which will entitle you to personal tax relief. Your pension provider will reclaim the basic rate of income tax on your contributions. The income tax reclaimed will be added to your pension pot. If you pay income tax at the higher or additional rate you will be able to obtain further tax relief.
The maximum you can personally invest in your pension is 100% of earned income subject to the annual allowance. This is currently £40,000, assuming your total income does not exceed £150,000 when the allowance is tapered. If, as an example, you have a salary of £8,000 and dividends of £45,000 the maximum you can personally invest is £8,000.
COMPANY PENSION CONTRIBUTIONS
On the basis that company pension contributions are deemed wholly and exclusively for business purposes, they will be allowance costs for corporation tax purposes. Contributions that are made by your company into a pension for you are not restricted by your salary; your company can invest the full annual allowance maximum of £40,000 and potentially more than this using carry forward.
The annual allowance of £40,000 is tapered where your adjusted earnings (your income plus any pension contributions) exceed £150,000. The minimum allowance is £10,000. For every £2 your adjusted income goes over £150,000, your annual allowance for that year reduces by £1. The minimum reduced annual allowance you can have is £10,000.
Your annual allowance will be significantly reduced if you continue to make contributions to a pension once you have already started drawing from another pension.
You usually pay tax if your pension pots are worth more than the lifetime allowance. This is currently £1.03 million. You might be able to protect your pension pot from reductions to the lifetime allowance.
If you are unsure about which method of contributing would work best for you and your company, contact your accountant, call our team on 0800 195 3750 or email email@example.com and we’ll be happy to answer any questions.
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