For savers who run their own business and have it incorporated as a limited company, it is vital that they prioritise saving into their pension to ensure they have enough to live comfortably in retirement. Below are five simple steps self-employed savers can make to contribute to their pension, to ensure they are saving efficiently towards their retirement.
Take advantage of tax relief on personal contributions from the government
When savers make personal contributions into their pension they can usually take advantage of tax incentives to boost their savings, such as tax relief on their contributions from the government. The standard amount of tax relief is a 25% tax top up for most basic rate taxpayers, meaning that for every £100 they put into their pension pot, HMRC effectively adds another £25.
Although there’s no limit to the amount savers can pay into their personal pension, there are limits to the amount they can contribute and still receive tax relief. For 2022/23 the annual limit is 100% of their salary up to a maximum of £40,000.
Self-employed savers may still be able to receive this tax relief on their pension contributions even if they don’t earn anything at all, as this relief is eligible on any pension contributions up to £3,600 gross. That means they could save up to £2,880 net, plus a 25% tax top up.
Higher and additional rate taxpayers should check if they’re eligible for further tax relief
Higher rate taxpayers may also be able to claim further tax relief through Self-Assessment. While there’s no limit to the amount savers can pay into their pension, there are limits to how much they can contribute and still receive tax relief.
For example, if these savers take a small salary and a large dividend from their company, their pension tax relief limit will be low. However, if they were to exceed the annual allowance limit, they would not be able to receive tax relief on the excess contributions.
Make use of employer contributions too
When self-employed savers set up their business as a limited company, as company directors they can make employer contributions into their pension. Since pension contributions usually count as an allowable business expense, they can be deducted when working out a business’s taxable profits, by offsetting them against corporation tax. This means business owners could save up to 19% on corporation tax.
However, employer pension contributions must abide by company pension rules for allowable deductions. The rules state that the pension contributions should be ‘wholly and exclusively’ for the purposes of business. To assess whether this is the case, HMRC looks for certain evidence – whether other employees are receiving comparable remuneration packages, for example.
Consider National Insurance contributions when contributing as an employer
Employers don’t usually have to pay National Insurance on pension contributions. The National Insurance rate for 2022/23 is 15.05%, so by contributing directly into their pension rather than paying the equivalent in salary, business owners could save up to 15.05%. In total, those who make employer contributions directly from their limited company could save up to 34.05% by paying money directly into their pension rather than paying money in the form of a salary.
Self-employed savers should ensure they contribute in the way that suits their personal circumstances
For self-employed savers who have their business set up as a limited company, it’s important for them to consider their personal situation when deciding whether to contribute to their pension through personal or employer contributions. Both forms of contributions have tax advantages, and what’s right for one saver over another will largely depend on their individual circumstances.
