Additional Pension Contributions
Overview 📘
Making additional pension contributions is one of the most effective ways to withdraw money from a company in a tax-efficient manner. It can reduce your corporation tax bill, boost long-term savings, and optimise your personal tax position.
Many directors and founders use this approach, particularly towards the financial year-end, to take advantage of these benefits.
✅ Key Things to Know
Annual Allowance
- Most people can contribute up to £60,000 into their pension each tax year.
- If your annual income exceeds £200,000, your allowance may be tapered. In that case, seek professional advice before proceeding.
Carry Forward of Unused Allowances
If you do not use your full annual allowance, you can carry it forward for up to three years.
💡 Example: If you have not made full use of your allowance in the previous three years, you may be able to contribute up to £240,000 in year 4.
To use this rule, you must have had a registered pension scheme open in the first year of the carry-forward period - so it’s wise to set up a scheme early, even if you do not make immediate contributions.
Pension Strategy for Directors and Founders
Many company owners take a low salary combined with dividends. This approach is tax-efficient but may mean you are not automatically enrolled in your company’s workplace pension scheme (which only applies above £10,000 salary).
In this case, it can be beneficial to:
- Open a separate director pension scheme.
- Pay contributions directly from the company as employer contributions.
- Contribute lump sums rather than regular amounts if preferred.
💡 Once a pension is set up, the administration is minimal. You simply make the payments from the company. The payments will be recorded as a tax deductible company expense.
📊 Employer vs Employee Contributions
For maximum tax efficiency, contributions should normally be made as employer contributions, not personal (employee) ones.
| Type of Contribution | Paid By | Tax Treatment | Benefits |
|---|---|---|---|
| Employer | Company | Tax-deductible for corporation tax | No personal tax charge, reduces profits |
| Employee | Individual | Paid from after-tax income | May get personal tax relief, but less efficient overall |
Employer contributions reduce company profits before corporation tax is calculated, making them far more advantageous.
🔬 R&D Tax Credits and Pensions
If your company claims R&D tax credits, pension costs related to R&D staff (including founders) can be included in qualifying expenditure. This can further enhance the tax efficiency of employer contributions.
Access and Liquidity
Pension funds are locked until retirement age, so they are not suitable for short-term goals such as saving for a home deposit.
💡 Only contribute funds that you can afford to set aside for the long term.
⚠️ Important Note on Financial Advice
Barnes & Scott are chartered accountants, not financial advisers. We can:
- Advise on tax and accounting treatment of pension contributions.
- Explain how contributions interact with company profits and R&D claims.
However, we cannot recommend specific pension products or investment strategies.
If you need help choosing a pension provider or managing investments, we can introduce you to independent financial advisers.
Remember that pension values can go up or down over time, and you may receive less than you contributed.
📊 Example Calculation
Scenario:
Tech Startup Ltd expects a profit of £40,000 in year 1. The founder decides to make an employer contribution of £40,000 into a pension scheme before year-end.
| Step | Impact |
|---|---|
| Company profit before pension | £40,000 |
| Employer pension contribution | £40,000 |
| Taxable profit after contribution | £0 |
| Corporation tax saving (19%) | £7,600 |
| R&D tax credit benefit (up to 27%) | Up to £10,800 |
| Total pension contribution in founder's scheme | £40,000 tax-free |
💡 Had this been an employee contribution, the corporation tax and R&D benefits would not apply -making it much less efficient overall.