Simple Pension Question (SIPP)

[Smackdown]

Hello,

I apologise in advance if this seems to be irrelevant/arcane to some but pensions are a big part of why I became a contractor (don't talk to me at dinner parties).

Scenario.

I would like to pay in the region of 60,000-100,000 year into my SIPP direct from my ltd company, that I'm a director for. Assume I pay nothing as a personal contributor and that I don't have any backdated allowance available.

I understand that this essentially has zero tax liability. I take my money from my client payment and pay it direct to the SIPP from company account. The tax man won't get a penny until I take the money out of the pension, at which point it becomes personal (income) taxation.

The complication.
I understand the annual tax allowance of £40,000 or salary (whichever is lower) is applied on tax rebates for personal contributions.

I've also read through some articles where it is implied that limited companies can pay upto £40,000. However that didn't make a lot of sense to me as that's a personal tax rebate limit and I suspected it may be incorrect.

So can my limited company make say, £60,000 /year contribution towards my SIPP as a working director? And can it do so without any tax liabilities?

[northernladuk]

Did you have a search for other articles. There are plenty out there that give the information you need in quite simple terms.

[Smackdown]

Did you have a search for other articles. There are plenty out there that give the information you need in quite simple terms.

Hello NorthernLadUk. I did have a trawl through but I was struggling to find an answer to my specific scenario. I know I can pay into a SIPP.

What I couldn't find was whether company SIPP contributions are bounded by the £40,000 tax relief limit or not; or whether there was any consequence to exceeding that limit assuming only company contributions.

[SeededLoaf]

There's is no limit to how much the company can pay in however the annual allowance of £40K applies to you personally. If you exceed the allowance, plus previous years contributions, then you'll end up with a tax bill.

"Your excess pension savings can be charged to tax in whole or in part at 45%, 40% or 20% depending on your taxable income and the amount of excess pension savings"

https://www.gov.uk/government/public...nual-allowance

[WordIsBond]

There's is no limit to how much the company can pay in however the annual allowance of £40K applies to you personally. If you exceed the allowance, plus previous years contributions, then you'll end up with a tax bill.

To be clear, contributions that the company pay DO count towards the annual allowance. https://www.pensionsadvisoryservice....nual-allowance.

So the total contribution, for allowance purposes, is the sum of any personal contributions you make AND any contributions the company makes.

So it is technically accurate to say there is no limit to how much the company can pay. But if the contributions exceed £40K / year, you (personally) WILL be taxed on the excess.

If you had a SIPP open in prior years, and didn't use your £40K allowance, you can carry forward up to three years of allowance. This has been discussed at some length on another currently running thread, I'm not going to recreate it here. If you want to make significant contributions and you don't have a SIPP open yet, you should be very sure to get it open before 5 April, so that you can use this year's allowance.

If your company makes contributions in excess of the allowance, the excess will be taxed at 20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate. So the tax liability you incur on excess contributions depends on how much other income you receive. But in general, the contributions, even in excess of the allowance, will not incur corporation tax or National Insurance. So depending on your circumstances, it may be advantageous to make excess contributions anyway, even though they incur personal income tax. Presumably you have an accountant that could run the numbers and advise you, or just use Excel, it's not that hard.

Alternatively, you could make contributions of £40K without any tax ramifications, retain the rest in the company until retirement or until you get tired of contracting and want to go back to permieland, and then do an MVL. It's not as tax efficient as pensions, but if Entrepreneur's Relief continues to be available it isn't bad.

[Smackdown]

There's is no limit to how much the company can pay in however the annual allowance of £40K applies to you personally. If you exceed the allowance, plus previous years contributions, then you'll end up with a tax bill.

"Your excess pension savings can be charged to tax in whole or in part at 45%, 40% or 20% depending on your taxable income and the amount of excess pension savings"

https://www.gov.uk/government/public...nual-allowance

Thanks for your time.

If I exceed it with my personal contributions or if the value of both my employer and personal contributions exceed that limit?

I assume that this tax bill has to be paid out of my 'income'; i.e. money in my personal bank accounts?

[Smackdown]

To be clear, contributions that the company pay DO count towards the annual allowance. https://www.pensionsadvisoryservice....nual-allowance.

So the total contribution, for allowance purposes, is the sum of any personal contributions you make AND any contributions the company makes.

So it is technically accurate to say there is no limit to how much the company can pay. But if the contributions exceed £40K / year, you (personally) WILL be taxed on the excess.

If you had a SIPP open in prior years, and didn't use your £40K allowance, you can carry forward up to three years of allowance. This has been discussed at some length on another currently running thread, I'm not going to recreate it here. If you want to make significant contributions and you don't have a SIPP open yet, you should be very sure to get it open before 5 April, so that you can use this year's allowance.

If your company makes contributions in excess of the allowance, the excess will be taxed at 20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate. So the tax liability you incur on excess contributions depends on how much other income you receive. But in general, the contributions, even in excess of the allowance, will not incur corporation tax or National Insurance. So depending on your circumstances, it may be advantageous to make excess contributions anyway, even though they incur personal income tax. Presumably you have an accountant that could run the numbers and advise you, or just use Excel, it's not that hard.

Alternatively, you could make contributions of £40K without any tax ramifications, retain the rest in the company until retirement or until you get tired of contracting and want to go back to permieland, and then do an MVL. It's not as tax efficient as pensions, but if Entrepreneur's Relief continues to be available it isn't bad.

Thanks, this is very interesting.

So my optimial scenario is to ensure that post-April I am a basic rate tax payer and to ensure pay is from dividends so not to escalate my tax rate.

I will then pay the money into my pension direct from the ltd company and I will have to offset some of it from my personal bank account.

Assuming 40k contribution has already been paid.
10,000 additional from ltd company to pension incurs basic rate repayment from my personal account.

I gain
£10,000 in pension

I lose
10,000 with no tax from ltd company
At 20% I owe £2,000 in my personal tax bill for that, which would of cost me £3,125 in company earnings to pay myself (20% corporation tax, then 20% dividend tax).

Edit - I think this means that is taxed at the same as LISA or ISA payments taking into account corporation and dividend tax on shifting the money into my account. It seems like it would make more sense to just pay it into my ISA/LISA and have more control over the money.

However I would be better off investing the money directly from my company and paying CGT and then shifting it at a rate of £40,000 a year into the pension. (i.e. my pension contributions are going to be spread at 40k a year for a longer period rather than intensely paid in).

Does this sound correct/reasonable to you gentlemen/ladies?

[northernladuk]

Erm. Bearing in mind we are talking 10s of K here with tax In the thousands for getting it wrong wouldn't it be better running it all past your accountant?

[Smackdown]

Erm. Bearing in mind we are talking 10s of K here with tax In the thousands for getting it wrong wouldn't it be better running it all past your accountant?

I would like to improve my own understanding as it's a lot of my money as well But yes I will talk to an accountant before it passes 40k.

[WordIsBond]

1. I am not an accountant.
2. I think I am pretty smart but
3. I am not an accountant.

That said, I think the excess will be ADDED to your other income for tax purposes. So, let's use an example.

Suppose you pay salary of £8K, dividends of £32K. That gives you £40K of taxable income, a little over half of which is taxed at 7.5% dividend tax, right?

Suppose you make a company pension contribution of £60K. There's no tax on the company, no NI. But you have £20K excess, over your annual allowance. I think the way it works is that the £20K is simply added to your £40K, giving you £60K in taxable income. That means you would have £5K taxed at 20% and £15K taxed at 40%.

I could be wrong. You should ask your accountant. If you are not using an accountant for something like this, you are likely to make a very expensive mistake. Don't do it. Or, if you do it, set aside a lot of money to pay the extra tax bill you are going to get hit with later when you finally engage an accountant to sort out the mess.

I think you'll have to accept that there is no way to regularly exceed the £40K limit without getting hit with a very significant tax bill. If you had a pension open in prior years and didn't use the full allowance, you can carry forward any that wasn't used in the last three years. If you have the money to do it and want to build your pension quickly, that's what you should do, make full use of any carry forward, and full use of the current year's allowance before April, and full use of the annual allowance going forward. Beyond that, it probably isn't worth it, in most cases. Like I said, you can avoid Corporation Tax and National Insurance, but you are going to get hit with 40% or perhaps 45% income tax on it, AND you lock down the money where you can't get it until retirement. It probably isn't worth it, unless you have just a few years to retirement, funds available that you don't mind locking up, and an underfunded pension. THEN it might be worth it. But even then, probably not.

But talk to your accountant. As NLUK says, there's tens of thousands in tax at stake with the money you are describing. If you rely on advice from the Internet for that kind of transaction, well, I appreciate your effort to fund society by paying extra tax dollars. My grandchildren will be grateful.