Most company directors are aware of the tax incentives and benefits that come from contributing to a pension. However, this has to be balanced with taking income from their business in the most tax efficient manner, which more often than not is through a lower salary supplemented with dividends.
Tax Incentives & Benefits
The maximum personal pension contributions that can be made each tax year is based on the lower of £50,000 or 100% of your pensionable earnings. In this instance pensionable earnings do not include dividends but do include salary and P11d benefits.
New Pension Rules
New rules introduced earlier this year will also allow the carry forward up to 3 previous years of unused annual allowance, however to make use of these you must have had a pension plan in force during that year (you don’t have to have paid any contributions, it just has to have been in force in that year).
The exclusion of dividends in calculating pensionable salary obviously presents some serious restrictions to a director’s pension funding, however the same limits do not apply to company funded contributions. Unfortunately it is still not possible to carry forward unused allowances unless an existing pension existed, however it is possible to make a company contribution in excess of your pensionable salary up to the £50,000 limit. The size of the contribution should be reasonable in relation to your overall income package. For instance, if your entire income (salary, P11d and dividends) is £15,000 and the company pays three times this amount into a pension then the local inspector of taxes may take exception.
Any company contribution is treated as an employee cost (in the same way as salary) and can be fully offset against corporation tax without being treated as a benefit in kind.