You can either make personal pension contributions or employer contributions from your company and depending on your current circumstances each method could be advantageous to you from a tax perspective.
Whilst there are a wealth of pension products available for those who want to invest their money in their futures, advice on which of these should be sought from someone who specialises in this area. However, if you want advice on the tax situation surrounding pension contributions and the best way to structure them to ensure that you are getting the tax relief you are entitled to, then an accountant who specialises in self employment, contracting and running your own business is ideal.
If you want to make contributions to a pension fund, then there are two ways doing so: you can make them directly as personal payments or through your company. There are tax advantages to both, so which one works best for you will depend on your circumstances.
Personal Pension Contributions
If you want to transfer some of your personal fund into a pension scheme, then you will be entitled to personal tax relief. Pension providers can reclaim the basic rate of tax on the contributions that you make and this will be added to your fund, meaning that an £80 payment will be worth £100. If you are a higher or additional rate tax payer then tax relief will also be available up to the top rate of tax that you pay.
If you want to benefit from tax relief on personal pension contributions, then the maximum you can invest is 100 per cent of your earned income from either employment or self employment, so long as this is below the annual allowance which is £40,000 in 2015/16. If you do not earn enough to pay income tax, then you can still receive tax relief on pension contributions up to a maximum of £3,600, meaning that you contribute £2,880 and the government tops it up to £3,600. If you pay in more than this amount then you will not be entitled to tax relief on the excess.
Example: If your gross annual salary is £10,000, then you can claim tax relief on up to £8,000 of pension contributions, as the tax reclaimed on this sum by your pension provider will total £10,000.
Company Pension Contributions
Pension contributions made by a company are deductible for corporation tax purposes, so long as you can demonstrate that they are wholly and exclusively for business purposes. Whist the guidance on what this means in practice isn’t definitive, in general if a remuneration package is reasonable and doesn’t result in an overall tax loss for the company, then the contributions can be deducted.
Annual Allowances can be carried forward from the previous three years if they have not been used, meaning that up to £190,000 can be contributed in 2015/16 so long as the following criteria are met; you must have been in a UK registered pension for the years in which your allowance was unused, and you must have earned at least as much as you want to contribute in the tax year in which the payment is to be made.
If you aren’t sure whether you should be contributing to a pension on a personal basis or through your company, then it could help to consider some of the following:
- Tax relief on personal contributions is limited to 100 per cent of an individuals salary or other earned income, meaning that any gross contributions, which exceed this amount will not normally be tax efficient.
- If your employment status means that IR35 applies to you, then pension contributions made on behalf of a company will always be more tax efficient as they are considered a qualifying expense under the applicable salary rules. This means that both employee’s and employer’s National Insurance Contributions are saved which would not be the case if personal contributions are made.
- Company contributions are safe from IR35. This means that if you were operating outside IR35, but were subject to an HMRC investigation which resulted in a decision that you should in fact have been operating inside IR35, then any pension contributions would be deducted from the salary due.
- Both annual and lifetime limits are imposed on the pension contributions that can be made. The annual limit is £40,000 in 2015/16 and the lifetime limit is £1,250,000 so if you want to contribute more than that then the excess will be liable for tax.
Pension Input Period
Although some pension providers will use the tax year as the pension input year, usually an individual’s annual allowance is based on the tax year in which their pension contributions begin, meaning that the input period usually ends on the anniversary of the date of the first contribution.
For most people, personal contributions up the level of their gross salary and then company contributions for any excess is considered the most tax efficient way of funding a pension. However, many people prefer the administrative simplicity of solely making company contributions, especially given the relatively low value of the contributions that can be made when a lower salary is paid.