You have a limited company, and you’re looking at how to save for your retirement by contributing to a Self-Invested Personal Pension (SIPP). You’re wondering what’s the best way to do this, given your salary is £12,570.
A Self-Invested Personal Pension (SIPP) can be a tax-efficient way for business owners, including those running a limited company, to save for retirement.
Here’s how it works:
Key Benefits of a SIPP for a Limited Company
- Corporation Tax Relief – Employer contributions to a SIPP are tax-deductible business expenses, reducing your corporation tax bill (currently 19% or 25%, depending on profits).
- No National Insurance (NI) on Contributions – Unlike salary payments, pension contributions from the company avoid employer and employee NI (13.8% and 8-12%, respectively).
- Tax-Free Growth – Investments inside a SIPP grow free from capital gains and income tax.
- Flexible Investment Options – SIPPs allow a wide range of investments, including stocks, bonds, ETFs, and even commercial property.
- Inheritance Planning – SIPPs do not form part of your estate for inheritance tax (IHT) purposes, and beneficiaries can inherit tax-efficiently.
How a Limited Company Can Contribute to a SIPP
- Employer Contributions: The company makes pension contributions directly to your SIPP. There’s no income tax or NI, making it more efficient than drawing dividends or salary.
- Annual Allowance: You can contribute up to your salary amount (£12,570) or up to £60,000, whichever is lower but carry forward rules allow unused allowances from the past three years.
- No Salary Requirement for Employer Contributions: Even if you take most of your income as dividends, your company can still make pension contributions.
Brokers than allow Limited Company SIPP Contribution
- Vanguard
- Hargreaves Lansdown
🔥 Best Strategy for Limited Company Owners
Plan Withdrawals – After 55, you can withdraw 25% tax-free, with the rest taxed as income. Use Employer Contributions to maximize tax efficiency. Consider Diversification – Invest in a mix of assets, potentially even commercial property for your business.
Tax Savings Example:
- Let’s say your company makes £100,000 before any expenses.
- If your company pays you £12,570, it has £87,430 left to be taxed.
- Without any pension contributions, it pays £16,611.70 in tax.
- If your company adds £25,000 to your pension, it has £62,430 left to be taxed.
- With the pension contribution, it pays £11,861.70 in tax.
- This means your company saves £4,750 in tax by contributing to your pension.
Benefits:
- Your company pays less tax by contributing to your pension.
- You save for retirement in a tax-efficient way.
- You can save even more if you have unused allowances from previous years.
Aspect | Without SIPP Contribution | With SIPP Contribution | Personal Pension Contribution |
---|---|---|---|
Salary | £12,570 | £12,570 | £12,570 |
Employer SIPP Contribution | £0 | £25,000 | £0 |
Personal Pension Contribution | £0 | £0 | Up to 100% of earnings or £60,000 (annual allowance) |
Total Allowable Expenses | £12,570 | £12,570 (salary) + £25,000 (SIPP) = £37,570 | £12,570 (salary) + Personal Pension Contributions |
Taxable Profit | £100,000 – £12,570 = £87,430 | £100,000 – £37,570 = £62,430 | £100,000 – £12,570 = £87,430 |
Corporation Tax | £87,430 × 19% = £16,611.70 | £62,430 × 19% = £11,861.70 | £87,430 × 19% = £16,611.70 |
Corporation Tax Savings | N/A | £16,611.70 – £11,861.70 = £4,750 | N/A |
Personal Income Tax | £0 (below Personal Allowance threshold) | £0 (below Personal Allowance threshold) | £0 (below Personal Allowance threshold) |
National Insurance Contributions (NICs) | £0 (below NIC threshold) | £0 (below NIC threshold) | £0 (below NIC threshold) |
Employer SIPP Contributions | N/A | Avoid additional NICs and personal income tax | N/A |
Personal Pension Contributions | N/A | N/A | Limited to 100% of earnings or the annual allowance |
By having your company contribute to your pension, you reduce the amount of tax the company pays and you build up your retirement savings. Since your salary is £12,570, you don’t get taxed on it, and the company’s pension contributions don’t get taxed either. This is a smart and efficient way to save for the future.