Should business owners make employer or personal pension contributions?
As a business owner, when considering making a pension contribution it is important to consider the tax implications.
Nobody likes spending more money than they have to.
Below we look at the tax implications of making an employer v’s a personal (employee) pension contribution, assuming the individual has sufficient relevant earnings.
Helen is a business owner who has taxable income of £45,000 and the funds to make a pension contribution either personally or through her Limited company, but which is right for them?
Personal pension contribution:
Dividend drawn to fund the pension £16,000*
Personal tax payable on the dividend @ 7.5% £1,200
Cost of funding the pension £17,200
Employer financed pension contribution:
Gross pension contribution made from the company £20,000
Corporation tax relief on the payment in 2021/22 (£3,800)
Cost of funding the pension £16,200
Saving by making an employer financed payment £1,000
Make this level of pension contribution each year and that’s a significant saving over your working life.
When making a pension contribution it is important to seek advice from both a qualified financial adviser and an accountant to ensure the tax reliefs above are available.
It’s also equally important to ensure that your pension contribution is invested in line with your overall attitudes and to take full advantage of the effect of compound returns.
* Paid in to the scheme, receives basic rate tax relief of £4,000, meaning total funds applied of £20,000.
