Tax question

[chewbacca]

I have a tax question that is vexing me:

taxable income for year from very good permie stint = £115000
salary from myCo = 0 (living off savings for rest of the tax year)
MyCo dividends for tax year 0

What is going to be best:
(1) make a contribution to SIPP from personal savings (to get down to 100k; could be up to £20k net contribution), or
(2) declare a "bonus" out of MyCo's warchest of £5k and use that from for (so I can get pension tax relief at the full 60% tax on the 20k between 100k and 120k)?

The way I understand it is:
(1) contribute 16k from savings, topped up to 20k in SIPP, claim back 7k via Self Assessment form, cost of 20k in pension = 9k
(2) (i) declare 5k dividend, deduct from taxable income, save 1k corp tax.
(ii) contribute 16k (11 savings and 5k bonus), topped up to 20k in SIPP, claim back 8k via Self Assessment form, cost of 20k in pension = 8k

So (2) gives me + MyCo an extra £2k for the tax year. What am I missing?

Would it be even better if I declare a dividend of £5k instead of pay a bonus of 5k?

[GlenW]

What's a bonus?

[Martin at NixonWilliams]

I have a tax question that is vexing me:

taxable income for year from very good permie stint = £115000
salary from myCo = 0 (living off savings for rest of the tax year)
MyCo dividends for tax year 0

What is going to be best:
(1) make a contribution to SIPP from personal savings (to get down to 100k; could be up to £20k net contribution), or
(2) declare a "bonus" out of MyCo's warchest of £5k and use that from for (so I can get pension tax relief at the full 60% tax on the 20k between 100k and 120k)?

The way I understand it is:
(1) contribute 16k from savings, topped up to 20k in SIPP, claim back 7k via Self Assessment form, cost of 20k in pension = 9k
(2) (i) declare 5k dividend, deduct from taxable income, save 1k corp tax.
(ii) contribute 16k (11 savings and 5k bonus), topped up to 20k in SIPP, claim back 8k via Self Assessment form, cost of 20k in pension = 8k

So (2) gives me + MyCo an extra £2k for the tax year. What am I missing?

Would it be even better if I declare a dividend of £5k instead of pay a bonus of 5k?

Your calculations are there or thereabouts.

The bonus payment would be subject to tax and NI, therefore a dividend would be more appropriate.

As you have pointed out, you should aim to make a pension contribution that reduces your net adjusted income to £100,000, this will make the most of the effective relief on where your total income sits between £100,000 and £120,000.

I hope this helps.

Martin

[chewbacca]

Thanks Martin. So it would be better to first increase my taxable income for the year to 120k, so I can make maximum use of the relief by then taking it back down to 100k, rather than just use savings to make the same size SIPP contribution (and leave taxable income at 115k)?

[TheCyclingProgrammer]

You seem to be under the impression that a dividend will save you corporation tax, unless I have misread your post. It won't, it comes out of post tax profit.

[GlenW]

What's a bonus?

This was a serious question, what is a bonus with regards to a Ltd Co director?

[Jessica@WhiteFieldTax]

This was a serious question, what is a bonus with regards to a Ltd Co director?

Its another name for salary / wage / pay / remuneration. Implies irregular rather than regular, but its earned income and taxed as such.

Possible complexities re NI calculations cf a regular salary.

[GlenW]

Its another name for salary / wage / pay / remuneration. Implies irregular rather than regular, but its earned income and taxed as such.

Possible complexities re NI calculations cf a regular salary.

Ta muchness.

[Martin at NixonWilliams]

Thanks Martin. So it would be better to first increase my taxable income for the year to 120k, so I can make maximum use of the relief by then taking it back down to 100k, rather than just use savings to make the same size SIPP contribution (and leave taxable income at 115k)?

It is difficult to say which is better, it depends on a number of things. If you're looking at making a £20k contribution then I think it makes sense to pay the dividend to ensure maximum effective relief. If the level of contribution is not important, you might prefer to make a £15k contribution instead based on your current level of earnings.

[chewbacca]

You seem to be under the impression that a dividend will save you corporation tax, unless I have misread your post. It won't, it comes out of post tax profit.

Yes, fair point and that was why I had not previously seriously considered a divi payment. My aim is to minimise aggregate amount of tax paid by myself and MyCo.