Contractors' Questions: Can I contribute to a pension via my PSC?
Expert’s Answer: In short, yes. Normally, when working out the amount that an individual can contribute into a pension, 100% of the salary can be used up to an annual contribution maximum of £40,000, receiving basic rate tax relief at source, and claiming any additional tax relief through your self-assessment.
The advantage that you will receive when making contributions through your limited company is that, despite your dividends not being counted as salary towards the pension contribution limit, you are still allowed to contribute the full £40,000 per annum when you are making the contributions through your limited company. When making these contributions from the limited company, you do need to prove that the contributions are ‘wholly and exclusively’ for business purposes, but as the shareholding director you shouldn’t encounter any issues with this.
When making these contributions from the limited company, you are going to receive corporation tax relief for doing so, meaning that for every £1 you pay into a pension via the limited company, you are going to receive a 19p saving in the form of tax relief. This is the most effective tax wrapper available for your investments, and means that in utilising your current years’ contribution allowance of £40,000, you could potentially make a tax saving of £7,600, which, no matter what your company’s turnover, is a significant amount of tax to save. It also, of course, ensures that you are going to have some funds for your well-earnt retirement!
The expert was Contractor Financials, adviser at the ContractorUK Money Club.