Pensions for Company Owners and Directors

Are you a company owner looking to maximise profits while planning a comfortable retirement? As the owner of a business, you can remunerate yourself in a flexible way that works for you and your goals, as well as the business's best interests.

The financially savvy may already understand the tax benefits of effectively managing your salary and dividends; typically, a small salary and larger dividend payment are more tax-efficient than a larger salary and smaller dividends, but this depends on your individual circumstances.

However, there is another option to consider: your pension contributions. Company owners may be able to use their pensions to boost retirement provisions and extract profits in a tax-efficient way.

The Corporation Tax main rate is at its highest since 2011

The main rate of Corporation Tax increased to 25% in 2023—the highest it has been since 2011. This means that businesses are paying a significant 25% tax on profits. 2023 also saw the re-introduction of the small companies rate, with a rate of 19% for companies making a profit of £50,000 or less.

How do pensions reduce tax liability?

Pension contributions are normally classified as legitimate business expenses. This means that they reduce the company's overall taxable profits, thereby reducing the Corporation Tax bill.

Pension contributions are, therefore, a highly tax-efficient way of extracting cash from your business.

Why should company owners and directors contribute to a pension?

For most business owners and shareholding directors, business assets (such as shares) may also be their retirement funds. However, building a substantial pension pot is a great way to further contribute to a comfortable retirement, and provides a valuable financial safety net and diversifier should your business not succeed to the level you wish.

When taking money from your pension pot, you can usually withdraw up to 25% of the total pension value as a tax-free lump sum (up to a limit of £268,275)*.

Tax may be payable on the remainder (at the recipients marginal rate of Income Tax), but depending upon individual circumstances, pension contributions can help business owners enjoy tax-free growth in pension investments and lower tax rates.

If you are a sole trader or self-employed, you may need to consider different factors when selecting your pension.

* Tax when you get a pension: What's tax-free - GOV.UK (www.gov.uk)

What kinds of pension plans are best for company owners/directors?

Pensions come in all shapes and sizes, and some will be more suitable than others for a company owner or shareholding director. When planning for retirement, it is essential to consider whether your existing pension (if you have one) is appropriate for significant contributions. For example:

• Does the pension plan offer sufficient flexibility?
• How is the money invested once it is paid into the pension plan?

As a default position, many company owners or directors are simply members of their company’s workplace pension scheme, like their employees.

These are designed to be efficient, easy to manage, and scalable; in other words, they are usually one-size-fits-all pension schemes.

It is therefore worth considering if such an arrangement is suitable for you to pay substantial contributions. Do such schemes meet your individual needs and retirement plans? While all personal plans will vary, you may wish to ensure that yours has the following features:

• A wide, suitable choice of potential investment options.
• A full suite of retirement withdrawal options.
• Flexibility and tax-efficient options upon death.

How to contribute to your personal pension through your company

Finally, let’s look at how owners and directors can contribute to their pensions through the company they own or direct.

• You can make regular monthly payments directly into your pension as a direct debit from the business bank account.
• Alternatively, you can make ad-hoc lump sum payments directly into the pension fund when cash flow and profit allows.

Important factors to consider

Pensions are an invaluable saving and retirement planning tool; however, they are rarely simple. Effective retirement planning means understanding as much as you can about where your money is going, what will happen when you need it, and the various legal and tax implications at play.

• Annual Allowance: This is, broadly, the total amount you can contribute to your pension each year without creating any personal tax liability. As of 2024/25, this is £60,000 per tax year. Depending on your circumstances, it may be possible to carry forward unused allowance from past tax years.
• Pension plan charges: Some pension plans may charge higher fees than others. If not chosen wisely, this can erode your pension pot over time.
• Investment risks: The value of pension investments can go up or down, directly affecting your retirement savings. Making poor investment decisions or not choosing an appropriate level of investment risk can impact your pension’s growth potential.
• Reduction in dividends: It is important not to impact your company’s financial position adversely, and you may need to reduce dividend payouts to yourself to offset the impact of the pension contributions on your company’s cash flow.

Why you should seek independent financial advice

Choosing a personal pension plan as a company owner is a complex decision with significant financial, tax and sometimes legal implications. This is why seeking independent financial advice is essential.

At Shorts, our qualified team of independent and chartered financial advisers can help you choose the right pension plan, maximise tax relief on contributions, choose the right salary and dividend structures, and advise on investment choices.

We can also help you with broader retirement planning, assisting with cash flow planning, tax-efficient withdrawals, other investments you might have, and inheritance tax planning.

The Financial Conduct Authority do not regulate tax planning or cash flow planning.

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed, and you may get back less than you originally invested.  

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.