Limitless pension contributions

21st May 2019 Nicky Cole
Grow Money

Whilst working on getting your business off the ground, you’ve neglected your pension savings. You want to make up for it now but fear that the annual contribution limits will prevent this. Is there a way around them?

Contribution limits

HMRC’s rules and limits on pension contributions are often misunderstood. You probably know about the pension “annual allowance” (AA) which limits tax relief for contributions. Contrary to popular belief, it doesn’t limit how much you can pay into a pension only the tax relief you’ll get. There’s a more obvious issue if you want to make a large pension contribution, especially if you’re a company owner manager who takes a small salary topped up with dividends.

The overlooked rule

Personal contributions to a registered pension scheme are limited to your net relevant earnings (NRE). Your NRE is the total of your taxable earnings, e.g. salary, benefits in kind, less tax deductible expenses, some tax reliefs and gift aid payments. This means even where the contributions you want to pay are less than the AA (plus unused AAs for the previous three years), the amount you can contribute is capped.

Example – Mary owns and manages Acom Ltd. For maximum tax and NI efficiency she intends to take a salary of just £8,500 in total for 2019/20. She has no other earnings or relevant outgoings and so her NRE figure is £8,500. She is not entitled to pay more than this into a registered pension scheme.

Tax efficiency conundrum

Despite Mary having stacks of AA going unused her low salary prevents her from building up her pension fund. One solution is for her to take more salary to hike her NRE. The trouble is this defeats the tax and NI savings she gets by adopting the “low salary plus dividends” strategy. The good news is there’s another solution which is equally tax and NI efficient. Tip. Instead of a personal contribution to her pension plan Mary can arrange for her company to pay an employers’ contribution. Most personal pension plans will accept employers’ contributions. If not just ask your pension company to amend the terms to allow them or start a new pension plan that does accept them.

Employers’ contributions

Employer pension contributions aren’t affected by the NRE limit. Plus, unlike other situations where your company pays for goods or services for you, it doesn’t count as a taxable benefit in kind. This means there’s no negative tax consequences for you and no NI for your company to pay.

Tax-deductible contributions

Your company can claim a corporation tax deduction for the pension contribution. Even where the contributions are large HMRC won’t challenge deductions. The only caveat to this is where your company’s contribution is large, in which case the tax deductions may be spread over a few years.

For any tax year you cannot pay contributions to a pension scheme that exceed your earnings. This can be a problem if you take a small salary from your company. The solution is for your company to pay an “employer’s contribution”. These aren’t limited to the level of your earnings and are equally tax and NI efficient.

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