It can be very tax-efficient for a limited company to make a pension contribution into a director’s pension fund. The contributions are likely to be tax-deductible (therefore reducing the company’s corporation tax liability) and as usual for pension contributions there are generally no personal tax implications for the director until the pension is drawn (subject to restrictions below).
There are, however, potential pitfalls which should be considered!
If the director’s remuneration package including the company pension contribution is excessive for the level of work done by the director, the excess amount would not meet the ‘wholly and exclusively’ test and would not be tax deductible.
It should also be noted that company pension contributions are tax-deductible in the period in which they are paid, not when they are accrued.
There are restrictions to the amounts which can be paid into directors’ pensions. Generally, the allowance is £40,000 per tax year, which includes contributions made by the directors personally as well as by the company. This can figure be increased by unused allowances from the previous three tax years, providing the director was a member of a pension scheme in those years.
The £40,000 annual allowance may be reduced if the total earnings of the director are over £200,000.