How do I make pension contributions?
You can make pension contributions in two ways – from your company’s income or from your own personal income.
Personal pension contributions are paid from your net income, after all applicable taxes have been deducted. However, these contributions are eligible for personal tax relief, which means that the pension provider will top up your contribution by 20%.
In addition, if you are a higher rate tax payer, you may be entitled to a tax refund when you complete your personal tax return.
Company pension contributions are paid from the company’s income, before tax. This means that you save both income tax and corporation tax on any pension contributions. It is almost always more tax efficient to make contributions directly from your company, although this isn’t always the case – your accountant will keep on top of this for you and advise on the most tax efficient way to top up your pension fund.
How much tax relief can I gain?
There is an annual pension contribution limit of £40,000, which can paid in without any adverse tax effect. Providing you have been a registered member of a pension scheme in the applicable years, you can use the three previous years’ annual contribution limits against pension contributions, made in the current year. To prevent abuse, you must use the current year’s annual allowance before using allowances from previous years.
When making personal pension contributions, the limit is capped at 100% of your yearly PAYE income (including the 20% additional top up).
It is worth bearing in mind the lifetime allowance – the total amount you can contribute in a pension over your lifetime, without adverse tax effects. As of tax year 2017/18 this is £1,000,000, although it is likely to change in future years.