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Paying contributions into a registered pension scheme can be an effective way of extracting profits from a family company.

Employer contributions can be made without limit, although they count towards the annual allowance.

Contributions made in excess of the annual allowance attract a tax charge, although to the extent it is unused, the annual allowance can be carried forward up to four years.

As a result of aligning the pension input period (the period against which contributions are measured against the annual allowance to see if the annual allowance has been exceeded) with the tax year from 2016/17, individuals have an annual allowance of £80,000 for 2015/16 (rather than the normal £40,000) but this is restricted to £40,000 for the period from 9 July 2015 to 5 April 2016. It should be noted that HMRC may challenge a corporation tax deduction if they feel the payments are excessive.

Note – from 2016/17 the pensions annual allowance is to be reduced by £1 for every £2 by which a person has adjusted net income in excess of £150,000 (including pension contributions), subject to a maximum reduction of £30,000 (ensuring a minimum annual allowance of £10,000).

Example:
Bill and Louise are directors of their family company. They each have a registered pension scheme.

In 2015/16 the company makes pension contributions of £20,000 each to their registered pension scheme. The £40,000 paid by the company is deductible for corporation tax purposes.