Employer pension contributions: What is it?

We are focussing on employer pension contributions as they tend to be the most effective structure for limited company contractors and freelancers (but as mentioned you should discuss your own specific circumstances with a pension advisor).

When a company makes employer pension contributions into a pension fund, the company is allowed to treat these contributions as a business expense just like with a directors salary, so the company saves 19% corporation tax on the expense.

A benefit with this over personal contributions is that you are getting some tax savings up front rather than in your pension fund which you can’t access until later in life.

One thing to be aware of is that HMRC will only allow your company pension contributions the corporation tax savings as long as your salary, any benefits-in-kind and pension combined are not seen to be ‘excessive’ for the role you are performing in the business.

So if you have a salary of £700 per month which is £8,400 for the year, and there are also £20,000 of employer pension contributions, HMRC would look at this total remuneration of £28,400 and make sure it’s not excessive for the role being performed.

In reality for a limited company contractor and freelancer working full time it would usually only be if you are making very large company contributions that you would start to go into dangerous territory and risk a HMRC challenge.

However if you are paying your spouse a salary and also making company pension contributions for them (make sure they are a director or company secretary) this is where things do get riskier if they are not performing a senior and full-time a role in the business, so we wouldn’t recommend going too high with their contributions.

Things to consider when assessing if your contributions are excessive:

• How much would you have to pay someone to do your role
• What is your level of experience and how senior is your role
• How many hours do you work i.e. how full time is your role
• Is the company making sufficient profits to support the level of contributions

Limits

There are some limits to be aware of with pensions.

The total maximum gross pension contribution (company and personal) per person is £40,000 per year for the 18/19 tax year.

If your ‘adjusted income’ is above £150,000 then new rules came in from 16/17 that reduce this £40,000 annual allowance – typically ‘adjusted income’ is your total taxable income plus any employer pension contributions.

Also you may potentially have un-used allowances from previous years you can bring forward to increase this limit (check with your pension advisor).

There is also a lifetime limit which for most people is set at £1,030,000 for the 18/19 tax year, if this is breached it will cause certain tax issues.