Dividends and Pensions – 2018/19

If you are the owner of a small or medium sized company chances are that your accountant has suggested you take a low salary and higher dividends…

But are you thinking about taking advantage of tax relief and making a large pension contribution?

If so, you probably know that in the current tax year (ending 5th April 2019) there is an annual pension contribution limit of £40,000.

This is known as the Annual Allowance.

If you want to pay a larger personal contribution into your pension scheme, you may be able to use unused allowances from up to three previous years. This is called Carry Forward.


If you receive a low salary and top up your income with dividends, maybe to keep your tax down, there is another limit you need to consider.

Personal pension contributions are capped at the level of your net relevant earnings (NRE).  These are your taxable earnings (such as salary less deductions) but don’t include dividends. 

Any personal contribution you make will be limited to your NRE which will probably be less than the Annual Allowance.

There might be another answer – can your company pay the pension contribution?

You see, Employer contributions aren’t limited by your NRE.

So can pay up to the annual allowance plus the carried forward unused allowance if required.

And, the pension contribution is usually a tax allowable deduction that you can claim against corporation tax.

Here is an Example:

John is a director and shareholder of PlanA Ltd.  He receives an annual salary of £12,000 plus dividends of £80,000 for the last 5 years. He has no other income.

He’s been paying a small annual contribution of £1,200 on the 1 January each year into his personal pension over that time.

John now wants to use his pension fund to purchase a commercial property which means he needs to make a one off contribution of £100,000.

But all he can pay as a personal contribution is £10,800 (£12,000 – £1,200) because his salary is too low under the NRE limits to pay the larger contribution.

So instead this is paid by the company and should receive corporation tax relief.

The rules allow him a total contribution of up to £155,200 in the current 2018/19 tax year (i.e paid on or before 5/4/2019)

His unused Annual Allowance for 2018/19 is £38,800.

Plus, he can carry forward unused allowances of £116,400 for the last 3 years:

2015/16: £40,000 – £1,200 = £38,800

2016/17: £40,000 – £1,200 = £38,800.

2017/18: £40,000 – £1,200 = £38,800.

Well within the £100,000 he needs for his property purchase investment.

Note: It’s important that you check that you qualify for the full standard Annual Allowance, and that you’re not restricted by either the Tapered Annual Allowance (which could reduce your annual allowance to £10,000) or the Money Purchase Annual Allowance (which reduces your maximum contribution to £4,000).

Call us now if you would like to have a chat about your own circumstances. The number is 0117 290 0370 (mention you saw this article).

Or you can email your contact details: hello@cardens.co.uk

Further reading: Employer Pension Contributions for a Company Director.

  • Hillary Carden

    Hilary is a force to be reckoned with in the pensions field. She founded Cardens in 1993 and Cardens Pension Trustees Ltd in 1995 and became one of the first women to become a Registered Life Planner® and with 30+ years experience of advising on and managing pension schemes, she really is an expert in retirement and financial planning.

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