Key points

• The tax benefits of paying into a pension could be reduced in the 30 October 2024 Budget.
• There is a chance any changes could be introduced immediately, instead of waiting until the start of the next tax year.
• If you have cash available in your limited company and you intended to contribute to a pension anyway, it could be better to take action before the Budget.
• Our advisers can help with each stage – including speaking with your accountant, agreeing a contribution amount, selecting a provider, and selecting an investment fund.
• Book a free initial meeting with one of our advisers to see if you are affected by any Budget change.

Benefits of paying into your pension

A pension contribution made from your limited company into your personal pension plan has the following potential benefits:

• Builds up your personal wealth.
• Not treated as a benefit in kind.
• Not subject to either employee’s or employer’s National Insurance Contributions (under current rules).
• Treated as a business expense for corporation tax purposes.
• Not subject to income tax.

Eligibility

A limited company can make contributions to an employee’s pension plan if:

• The contributions are made “wholly and exclusively for the purpose of trade”.
• The contributions are commensurate with the employee’s role.

The purpose of these rules is to stop company owners gaming the tax relief system – such as by having their spouse work for just a couple of hours per week in exchange for a £100,000 pension contribution.

Maximum amount

If you make a pension contribution from your own personal bank account, the maximum contribution (including tax relief) is equivalent to your salary excluding dividends.

But limited company owners often minimise their salary payments and take dividends instead. This limits how much you can personally pay into your pension plan.

Pension contributions made from a limited company bank account in respect of an employee (such as a director) are not limited by this salary cap.

Instead, the relevant limit is called the “Annual Allowance“. These rules are complex but, for most people, it means a limited company can pay in up to £60,000 per tax year per employee.

If you have been a member of a pension plan in previous tax years – even if you did not make contributions in those years – you can also use any unused Annual Allowance in the last three tax years. This is called “Carry Forward Relief”. Using current rules, this means up to £200,000 can be paid into a pension plan in a single tax year.

Potential changes

The current government has openly admitted it will use the Budget to raise taxes. Raising tax money from pensions is often seen as “low-hanging fruit”; lucrative and easy to do.

There are two potential ways in which pension rules could be changed to the disadvantage of limited company owners:

1. Reduce the amount which can be paid in – for example, reducing the Annual Allowance from £60,000 to £40,000, or £20,000 (etc) will limit how much can be paid in which, in turn, will limit how much tax relief is available.
2. Levy a tax on employer pension contributions – as noted above, pension contributions made by employers into employee pension plans are currently not subject to either P11d rules or employer National Insurance Contributions, so this could be implemented.

Regarding the second point, there are already industry rumours this could change: at least two pension providers were recently contacted by HM Treasury regarding the feasibility of levying employer National Insurance Contributions on employer pension contributions.

The employer rate is currently 13.8%, so this change would significantly reduce the benefit of a limited company owner making pension contributions.

Action points

If you were already considering making a pension contribution in the coming months, it could be appropriate to bring this decision forward to before the Budget. This does not guarantee you will avoid any changes introduced in the Budget, but such changes tend to only come into effect either the day of the Budget or at the start of the next tax year (06 April 2025).

One of our advisers can help you decide how much to contribute, where it should be contributed to, and what it should be invested into (ranging from cash to investments, depending on your circumstances).

Our current fee for this work is 2% of the first £100,000 and then 1% for any amount above £100,000.

We offer free initial meetings for new clients, to let you find out more about your options at no cost.

To book a free initial meeting with one of our advisers, please call 01642 477758 or visit our Contact page.