Introduction
As a limited company director, contributing to a pension through your business isn’t just a way to secure your financial future. It can also be a highly tax-efficient strategy, helping to reduce both corporation and capital gains tax liabilities while maximising your retirement savings.
If you’re a limited company director, you have the option to contribute to your pension as either an employer or as an individual. In both cases it’s possible to claim tax relief. However, making contributions through your company (rather than personally) is often the more tax-efficient route.
How much can my limited company contribute to my pension?
For non-limited company directors, pension contributions are usually tax-free up to either £60,000 or annual salary – whichever is lower. But as a limited company director, your business can make pension contributions without being limited by salary restrictions.
In line with the current annual allowance, your company can contribute up to £60,000 a year without incurring tax (even if your profits are below that amount). Remember though, any contribution you make to pensions elsewhere (for example, the NHS Pension Scheme) may also be using up your annual allowance.
If you’re contributing to multiple pension pots, calculations can soon become complex. Seeking professional financial advice can help you maximise tax-efficiency and avoid unnecessary charges.
Tax treatment depends on your individual circumstances and may be subject to change in the future.
Tax relief for limited company directors
While running a limited company comes with its share of responsibilities, it also opens up a number of valuable tax relief opportunities that may help you keep more of what you earn.
Some common tax advantages include:
- Corporation tax
- Income tax and national insurance
- Capital gains tax
- Employing family members
When your limited company contributes to your pension, the payment qualifies as an allowable business expense. This means that it can be deducted from your company's taxable profits, typically reducing your corporation tax liability.
Another advantage is that employer contributions are not subject to income tax or national insurance deductions. By directing funds into your pension rather than paying the equivalent in salary, you can reduce your personal tax liability and overall employment costs for your business.
As the owner of a limited company, you may be eligible for Business Asset Disposal Relief (BADR) when you come to close down your company.
BADR allows you to pay a lower rate of capital gains tax (CGT) when you ‘dispose’ of all or part of your business (currently 14% and rising to 18% from April 2026). However, you must meet the definition of a trading company to qualify.
A common issue for limited company directors is holding too much cash in the business – particularly if it’s more than 20% of assets that aren’t needed for trading purposes. If this is the case, HMRC may view your business as a non-trading company, disqualifying it from BADR.
Put simply, the more money retained in your business at the point of closure, the more you pay in CGT. That’s why it often makes sense to reduce surplus funds in advance – through pension contributions, dividends or commercial investments, for example – before you wind the company down.
Another commonly used tax strategy is employing a partner, spouse or other family member within the company.
Wages paid to family members are a deductible business expense, thereby lowering your corporation tax bill. What’s more, if their personal tax allowance isn’t exceeded, they won’t pay income tax – but your company will still benefit from the deductible expenses.
Bear in mind though, HMRC requires any employment to be genuine and remunerated at market rates. This means the family member must be qualified for their role, perform real duties and be paid a reasonable wage for the work they do – essentially, what you would pay a non-family member in the same role.
What is the best pension for a limited company director?
Limited company directors aren’t automatically enrolled into a workplace pension. This means you have the freedom to choose an option that aligns with your financial goals, rather than being tied to a default scheme with limited investment options.
This flexibility also means you can prioritise what matters most to you – whether that’s taking a sustainable approach to investing, having access to specialist financial advice or tailoring contributions to suit the cashflow of your business.
Ultimately, the best pension for you will depend on your individual circumstances and the needs of your company. This is why seeking professional advice is so important. Your pension scheme only forms part of the financial picture, and oftentimes the real difference comes from the guidance that comes with it.
At Wesleyan Financial Services, our experts take a holistic approach to advice, working closely with your accountant and solicitor to make sure your pension strategy aligns to your personal and professional goals. They can help you make informed decisions, safeguard your assets and confidently plan for the future.
To find out more, book an appointment with a Specialist Financial Adviser today. Please note advice charges may apply.
Other ways to withdraw money from your limited company
How you choose to withdraw money from your limited company will largely depend on your individual financial circumstances. Is the money you earn from your business your sole source of income? Or is it a secondary stream, supplementing other earnings?
For example, if you run a dental practice and live on your earnings, taking a salary may be appropriate. If you’re a doctor who has set up a limited company to carry out occasional private work (while already earning an NHS salary), you may choose not to draw a salary to avoid being pushed into a higher tax bracket.
While there isn’t a one-size-fits-all approach, some common options for withdrawing company funds include:
Salary and expenses
One way to withdraw money from your company is to pay yourself a salary via PAYE. Bear in mind that this salary will be subject to income tax and national insurance contributions (both employer and employee).
This is why most directors take an income that doesn't exceed set tax brackets, especially when it comes to the following thresholds:
- £12,570 - This is your personal allowance. Directors can cap their salary here to avoid income tax altogether.
- £60,000 - Earning over £60,000 a year can result in a loss of child benefit for families with young children.
- £100,000 - At the £100,000 mark, two things can happen. The first is that you will lose access to tax-free childcare. The second is that your personal allowance (£12,570) will begin to gradually reduce until it reaches zero. This means you will pay income tax on everything that you earn.
Given the potential impact of exceeding these tax thresholds, it’s wise to structure your pay in a way that avoids these pinch points.
Dividends
If your company has enough profit, a dividend payment can be made to shareholders. This money must be taken after corporation tax has been deducted, otherwise it will be considered unlawful. Please note that dividend payments must also be agreed at a board meeting with all directors (even if there is only one), with minutes submitted to HMRC as evidence.
Director's loan
Put simply, this is when a company director borrows money from the company or lends money to the company. As with all loans, this money must be repaid within a certain timeframe to avoid tax consequences.
Please note that if you’re a director but not a shareholder, the rules around taking money out of your business (and other potential tax implications) may be different.