How to do Self-Invested Pension SIPP

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

  1. 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).
  2. 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).
  3. Tax-Free Growth – Investments inside a SIPP grow free from capital gains and income tax.
  4. Flexible Investment Options – SIPPs allow a wide range of investments, including stocks, bonds, ETFs, and even commercial property.
  5. 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.
AspectWithout SIPP ContributionWith SIPP ContributionPersonal Pension Contribution
Salary£12,570£12,570£12,570
Employer SIPP Contribution£0£25,000£0
Personal Pension Contribution£0£0Up 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 SavingsN/A£16,611.70 – £11,861.70 = £4,750N/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 ContributionsN/AAvoid additional NICs and personal income taxN/A
Personal Pension ContributionsN/AN/ALimited 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.

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By Ash Thomas

Ash Thomas is a seasoned IT professional with extensive experience as a technical expert, complemented by a keen interest in blockchain technology.