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If you work through your own limited company, you can claim tax relief through pensions and build your own pension. There are two ways of making contributions to your pension fund: personal and company pension contributions.
If you want to transfer some of your personal fund into a pension scheme, you will be entitled to personal tax relief. Pension providers can reclaim the basic rate of tax on the contributions that you make and this will be added to your find, meaning that an £80 payment will be worth £100. If you are a higher or additional rate tax payer, tax relief will also be available up to the top rate of tax that you pay.
If you want to benefit from tax relief on pension contributions, the maximum you can invest is 100% of your earned income from either employment or self-employment.
Pension contributions made by a company are deductible for corporation tax purposes, as long as you can demonstrate that they are wholly and exclusively for business purposes. Whilst the guidance on what this means in practice isn’t definitive, in general, if a remuneration package is reasonable and doesn’t result in an overall tax loss for the company, then the contributions can be deducted.
Annual Allowances can be carried forward from the previous three years if they have not been used, meaning that up to £160,000 can be contributed in the tax year so long as the following criteria are met:
If you are unsure whether you should be contributing to a personal or company pension, considering some of the following options could help you to make your decision:
•Tax relief on personal contributions is limited to 100% of an individual’s salary or other earned income, meaning that any gross contributions, which exceed this amount will not normally be tax efficient
•If your employment status means that IR35 applies to you, then pension contributions made on behalf of a company will always be more tax efficient as they are considered a qualifying expense under the applicable salary rules. This means that both employee’s and employer’s National Insurance contributions are saved which would not be the case if personal contributions are made
•Company contributions are safe from IR35. This means that if you were operating outside IR35, but were subject to an HMRC investigation which resulted in a decision that you should, in fact, have been operating inside IR35, then any pension contributions would be deducted from the salary due
•Both annual and lifetime limits are imposed on the pension contributions that can be made. The annual limit is £40,000 in 2019/20 and the lifetime limit is £1,055,000 so if you want to contribute more than that then the excess will be liable for tax
Our team of expert accountants can help you through your pension process and make the best decision for you. We’ll do this by ensuring that you make the most of the tax efficiencies available.
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