Anyone who owns a limited company is now fully aware of the extra tax on dividends we have to pay now. The average single-shareholder company earning £40,000 after corporation tax is approximately £2000 p.a. worse off in tax.

Therefore we must be more creative with our distributions from companies. Paying money into a pension scheme is one.

Assuming you are already paying into a pension from personal funds.

• Money paid into a pension from your company saves corporation tax as it counts as an allowable cost.
• Also you don’t have to pay extra personal tax by reducing the amount of dividends as you need less money because you are no longer making the pension payments personally.
• The pension provider must be informed to say it is a company pension payment.

How it works

• When one pays into a pension from personal funds say £80, Hmrc tops up to £100 = 20% tax relief.
• Therefore when your company makes the payment of £100, it saves corporation tax of £20 = 20% relief. 
• You are making the gross payment instead of the net payment when you pay personally.
• This is tax neutral, you company receives tax relief instead of Hmrc giving you personally the tax relief.
• The pension provider must be informed so it does not claim extra tax relief from Hmrc.
• As you require fewer dividends, you save personal income tax.
• If are a full HR tax payer, the reduced dividend will save tax 32.5% (£1000 x32.5% =£325 saving)
• If are a BR tax payer, the reduced dividend will save tax 7.5% (£1000 x32.5% =£75 saving).

If you are not already paying into a pension but wish to, especially if you have money stuck in the company, it means you can do so without incurring any additional personal tax.

Pensions are regulated and I cannot give advice. You must see a Financial Adviser. Pension are not right for everyone, this tax advice is for client who already pays or happy to commence paying into a pension.