Directors’ Pension Adviser Cambridge

A Director’s pension is not just about saving for retirement, it is a great way to extract business profits tax-efficiently and for your benefit. Contributions are a deductable business expense and can help reduce your business’s corporation tax liability.

Did you know that a Self-Invested and Small Self-Administered pension scheme can invest in business assets like commercial property and make loans back to your Company?

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"My business is my pension"

You may be fortunate and sell your business one day, but let’s be honest, some businesses fail or simply get wound up when the directors retire.

The good news is that directors’ pensions are held under a trust arrangement. Therefore, if the worst happens business creditors, including HMRC, can not under normal circunstances make a claim against your pension investments.

Making pension contributions for directors is also far more tax-efficient than withdrawing money from the company through salary or dividends. Any drawings like that are taxable and do not benefit from the tax-relief that pension contributions receive.

Directors’ pensions are normally funded by company contributions only

Business owner directors’ pension contributions are usually funded by the company. However, non-business owning directors can also make personal contributions that will qualify for tax-relief at their highest marginal rate.

When personal contributions are paid in by a director or employee, the most tax-efficient way is through ‘salary sacrifice’. This means the contributions are taken from gross earnings, rather than after tax earnings. This has the effect of reducing the director’s salary and benefitting from income tax relief at source, it also achievies savings in national insurance contributions (NICs) for both the director and the employer. This could be especially important given NICs are rising from April 2025.

The other main benefit is the investment flexibility that a director’s pension can provide. Under certain circumstances the pension also has the ability to loanmoney back to the company, making it a very useful business planning tool.

What if I need my money now?

Since April 2015, and if you are aged at least 55, new legislation commonly referred to as “Pensions Freedom” allows more flexibility on how your pension fund can be accessed. However, one has to be careful of the tax consequences as normally only 25% of a pension fund can be taken tax-free and anything taken above that is taxed as income at one’s highest marginal rate but unlike earned income, without being subject to National Insurance Contributions (NICs).

Things to consider:

HMRC limits – An annual allowance limits the amount someone can pay into pension schemes each year before they must pay tax. It is £60,000 in 2024/25. It is possible for the employer to pay the full amount regardless of the Director's salary provided certain conditions are satisfied.
HMRC limits – An individual cannot usually receive tax relief on pension contributions worth more than 100% of their annual earnings. However, referring to the point above, contributions paid by the employer are treated differently. They are treated as a business expense and, therefore, deductable for the purposes of calculating profits. This can result in the reduction of the employer's corporation tax liability.
HMRC limits – The annual allowance is tapered (reduced) for higher earners. It is reduced by £1 for every £2 someone earns over £260,000 (including pension contributions). Tapering stops when the annual allowance reaches £10,000.
Abolition of the lifetime allowance - There was a limit on the amount people can build up in pension schemes over their lifetime and still receive tax relief. At the Spring Budget 2023, the government announced that it would abolish the lifetime allowance. It started this process by removing the tax charge for exceeding the lifetime allowance from 6 April 2023 and abolished the lifetime allowance fully in the Finance Act 2024 from 6 April 2024.
Values – The investments held within a pension can fluctuate in value and are not guaranteed, neither are the benefits at retirement. These will be affected by economic circumstances, including interest rates at that time.
Registration – The pension scheme must be registered with HMRC in order to benefit from tax relief.

In a nutshell:

HMRC limits – the annual allowance for contributions is £60,000 (2024/25) and subject to earnings, and unused annual allowances can be carried forward from the previous 3 years. The annual contribution limit may be reduced to as low as just £10,000 per annum for someone earning more than £260,000 per annum.
Abolition of the lifetime allowance - At the Spring Budget 2023, the government announced that it would abolish the lifetime allowance. It started this process by removing the tax charge for exceeding the lifetime allowance from 6 April 2023 and abolished the lifetime allowance fully in the Finance Act 2024 from 6 April 2024.
Legislation – The rates and limits on pension tax-relief are set by government legislation. As with all legislation, these are subject to change in the future.
Values – The investments held within a pension can fluctuate in value and are not guaranteed, neither are the benefits at retirement which will be affected by economic circumstances.
Registration – The pension scheme must be registered with HMRC in order to benefit from tax relief.