Closing company is it worth making pension payment first

[swebb]

I am closing my company and going permie for a while, maybe a long while.

I have been paying myself enough to cover my NI contributions for a few years but not much more.

I am considering paying 5K or so in to my SIPP via the company before it closes but I am wondering if I would be better taking the 10% hit on the company pot, getting the cash and then making the contribution whilst permanent. This way I could get my pension provider to claim 20% back from HMRC. The only thing I am unsure of is could the 20% be claimed as I haven't paid myself much this year. I suspect by April I would be well in to the 20% tax bracket but it all depends on how things pan out.

Thoughts ?

[WordIsBond]

Have you already paid corporation tax on the money in the company pot? It makes a big difference to how this question is answered.

If you haven't, then the payment to the pension reduces your corporation tax liability (20%), and then you don't get hit by 10% on what is left. So you effectively save 28% on tax on what you pay into a pension.

If you have paid corp tax, then you are only saving 10% on putting it into a pension, which isn't very much.

Remember that with a pension, it is locked up for a long time, so you are putting yourself in handcuffs. That may be a good thing, if you aren't disciplined enough with your money, but it also means it isn't available for buying a house or major family emergencies. But the other thing about a pension is that, after the tax free lump sum, it is all going to be taxable when you draw it out. So anything above the personal allowance is going to get taxed at whatever the basic rate is going to be at the time. So if you only save 10% on taxes by putting the money in now, you probably will end up paying more later than you've saved now.

So if corporation tax has already been paid, it would be a big mistake, I believe, to make a payment into a pension now. It would be better to take the funds and pay the 10%, and get the money into your name without a big tax hit.

What you do after that could vary. You could put it into ISAs, so that the investment income isn't taxable, and then all of it is available to you whenever you need it without tax ramifications. You can put it into a pension once you start your new job, and if you are a higher rate taxpayer you get higher rate tax relief on it. If your company has the option, you can use this money to live on and do a large salary sacrifice into a pension, and then you'll not only save on income tax but also on NI contributions.

There are so many variables here that you may want to discuss with your accountant and an IFA. The best answer depends on whether the profit in the company has already been taxed, what is your current income, what is your future income in your new job, what is your attitude towards risk, will you blow the money if you don't lock it away, and a lot of other variables.

And of course, there's also the possibility that the option to make before-tax pension contributions may be going away. Just one more thing to throw into the mix.

So get advice, but this should give you a few questions to ask....