Director Pension Contributions Galway: A Comprehensive Guide

Director Pension Contributions

Director Pension Contributions Galway: A Comprehensive Guide

Among the multiple advantages of owning a limited company, one significant one is the option to make tax-efficient director pension contributions to a company. You can make payments into a private pension from your personal earnings and directly through the company – both offering you impressive tax benefits.

This article explains company director pension schemes, including the type of contributions you can make, pension tax relief, and contribution limits.

Pension For Company Directors

Setting up a pension plan may not be the biggest priority on the list when growing a business, but it’s crucial to start planning for retirement as early as you possibly can. Since you are the owner running the business, the sole responsibility of setting up a workplace pension solely lies on you.

As the director of a company, you have the option to avail two company director pension schemes: 

  1. The State Pension
  2. Private (personal) Pension

The State Pension is unlikely to cover your expenses and keep you afloat after your retirement. Therefore, it is highly advisable to set up a private pension to enjoy a more cushioned life after retirement.

Apart from solidifying the financial dexterity for your future, private pension plans are also an incredibly tax-efficient way to extract profits from your company.

Personal Contributions

Using your PAYE director’s salary, you can make personal contributions to your private pension and enjoy a 20% tax relief bonus from the government on every contribution you make.

Is It Possible To Make Pension Contribution From Dividend Income?

Yes, it is possible to make additional pension contributions from your dividend income. But, usually it is not recommended because:

  • You won’t get any tax relief on pension contributions from dividend income.
  • Dividends are paid from company profits after the deduction of corporate tax.
  • You will have to bear dividend tax on dividend income above your £1,000 annual dividend allowance.

For these reasons, it is advisable to make personal contributions into your pension pot from your PAYE director’s salary rather than dividends.

However, most company directors pay themselves a relatively small salary, typically up to the tax-free annual Personal Allowance of £12,570, and then take the rest of the income as dividends.

Company Contribution

Director pension contributions Galway made directly from your limited company are not restricted to the salary threshold and the annual pension allowance limit.

At the same time, you can pay more than £60,000 per year into your director’s pension pot as long as the total amount does not exceed your company’s annual profits.

HRMC treats pension contributions as an allowance business expense if the payments are ‘wholly and exclusively’ for the purposes of the profession, trade or vocation.

This, in turn, means that you can offset the contributions against your business profits and reduce your company’s Corporation Tax bill, which provides tax relief of 19% to 20% (based on your company’s annual profits, and hence the rate of Corporation Tax it pays).

Unlike personal payments from your salary contributions to directors pension Ireland from your company are not liable for Income Tax, National Insurance or dividend tax.

What Is The Maximum Amount That Can Be Contributed To A Director Pension Plan?

Luckily, in the UK, there is no specified limit on the amount of money one can contribute to a private pension.

Therefore, you can make contributions to the director’s pension as much as you like.

Having said that, two thresholds do limit the amount of tax relief you can receive on these director pension contributions Galway:

  • Annual allowance 
  • Lifetime allowance 

What Happens If The Pension Contribution Exceeds The Annual Allowance?

Primarily, it is your responsibility to keep track of your total pension contributions. Anytime you exceed the pension annual allowance in a tax year, you will receive a statement from the pension provider.

In this case, either you or the pension provider will have to bear the “pension annual allowance tax charge” on the excess contributions. You will need to declare this in the “Pension saving tax charges” section on your next Self-Assessment tax return, even if the pension provider pays some or all of the charge.

The rate of the charge will be directly linked to the highest rate of Income Tax that you pay.

Director Pension Contribution Is Tax Efficient

As a director, you can make tax-efficient pension contributions to the pot both as an individual and via your limited company. You can claim pension tax relief not only on your contributions as an individual but also on contributions made through business.

The absolute maximum a company director can contribute to a pension and still enjoy tax relief – including both employer and employee contribution – is £60,000 per year or 100% of your salaried earnings – whichever is lower.

However, the figure starts to narrow down for those earning more than £260,000 by £1 for every £2 they earn above this threshold.

How To Apply For Tax Relief For A Director Pension?

Claiming tax relief on a director pension is not as complicated as it seems.

When you make personal contributions, your pension provider will claim the first 20% tax relief on your behalf, known as a ‘relief at source’. This is the same as the basic rate of Income Tax, which you will have already paid on your salary through PAYE.

Once the government approves the claim, the tax bonus will be automatically added to your pension pot within a span of two to three months.

However, if you are a higher-rate or additional-rate taxpayer, you will personally need to claim your additional relief when you file your Self Assessment tax return.

Higher taxpayers can claim an extra 20%, and the additional rate taxpayers can claim a further 25%.

How To Qualify For The State Pension?

The State Pension is a nominal, recurring payment that the government provides to most people when they reach the State Pension age. This amount is directly related to the National Insurance contributions (NIC), with the maximum sum currently sitting at £203.85 per week or £10,600 a year, which is paid every four weeks.

To receive a full State Pension, you must have 35 ‘qualifying years’ of NIC. And to be eligible for any State Pension at all, you will require at least 10 qualifying years of NIC.

Even if you are eligible to receive the full amount, it will be insufficient to fund a comfortable retirement. This is the reason it is crucial to set up a private director pension scheme and take advantage of the tax reliefs available on your personal and company contributions.

Closing Thoughts

Setting up a directors pension Ireland scheme is one of the tax-efficient ways to extract profits from your business and accumulate much-needed wealth for your retirement. With the right director pension contributions Galway planning, you will benefit significantly from tax savings and tax reliefs – making a combination of payments through your director’s salary and directly from company profits.

Pensions and retirement savings for directors can be notoriously complex to navigate. Therefore, we recommend that you consult with an experienced financial advisor like that of Money Maximizing Advisors Limited to discuss your options. They will help you find a director’s pension scheme that suits your needs and advise on the best strategy for making regular contributions to your pension savings.

Talk to us at +353 91 393 125

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Or visit our office at Unit 3, Office 6, Liosban Business Park, Tuam Rd, Galway, Ireland

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