Personal Pension Contributions and Effect on Dividend Payments at 7.5% Rate

[Paralytic]

(Before anyone says speak to your accountant, this is for my self-assessment, not for my PSC, and I do my own personal finances)
(Before anyway says speak to an accountant anyway, then please move on - that is what the internet is for)

I'm looking at my 2018-19 self-assessment and trying to work out what Dividend I paid myself (sorry, could have paid myself ) on March 31st 2019, so as to maximise the Dividend amount but limit the tax due to the 7.5% rate.

In January 2019, I paid (from personal funds) the max amount I could into my Personal Pension based on my earned income. This was £11,850 gross, matching my salary for that tax year. I paid £9,480 (net amount) from my personal bank account and my pension provider topped it up with the tax relief.

The question is, in my self assessment tax return, there is the field that asks for:

"Payments to registered pension schemes (Also known as PPR) where basic tax relief will be claimed by your pension provider (called Relief at source). Enter the payments and basic tax rate"

The help page for that field is here: HMRC: Help

When I enter the gross £11,850 amount here, and amend the rest of my return, it effectively means I can (sorry, could have ) paid myself and additional £11,850 in dividends for the 2019-2020 tax year at the 7.5% tax rate.

Is that right? I think it is, but have this niggling doubt since the £11,850 already contains the 20% tax relief credit?

Adding the pension amount also adds this commentary to the "Full Calculation" page on the tax return

Your pension payments of £11,850.00 have increased your basic rate limit.

Your basic rate limit for income not subject to rates has also been increased.

This ensures you receive additional relief on your contributions at your highest marginal rate of tax.

Am I missing something here?

[Cirrus]

Am I missing something here?

Yes. You could have paid yourself £40,000 if you'd done it directly from your company.

[Paralytic]

Yes. You could have paid yourself £40,000 if you'd done it directly from your company.

You didn't actually answer the question I was asking, but I'll play along...

I topped up my pension from my personal account because I had disposed of some assets (these funds had not originated from my PSC) and it was the best use of the funds to give me a balanced portfolio.

I didn't pay it from the company as I was waiting till this point of the year to see what my warchest balance would be and how IR35 panned out. As it is, I intend to use the remainder of last years £40K allowance this year, along with this years £40K allowance, to top my pension up by £68,150, in order to reduce this years corporation tax.

So, no I'm not missing that; I know I could have done that. If I was unsure about that, I would have asked that.

Now, back to my post. Any thoughts on my actual question, or did you just reply to make some noise?

[Spoiler]

Download the Crunch personal tax estimator 2018-19 and plug in your numbers.

Had a quick play, and when I stick in:
PAYE income: 11850
Pensions PAID: 9480
Dividends up to the HRT level: £46,350

[Paralytic]

Download the Crunch personal tax estimator 2018-19 and plug in your numbers.

Had a quick play, and when I stick in:
PAYE income: 11850
Pensions PAID: 9480
Dividends up to the HRT level: £46,350

Thanks, that the exact max at which the 7.5% tax runs out in my SATR.

[WordIsBond]

Sounds correct. But if you'd asked a good accountant for advice, he'd have advised you to make the pension contribution from your company so as to save corporation and dividend tax, even if you had the excess funds. CT and DT combined are greater than the tax relief on the pension.

[Paralytic]

Sounds correct. But if you'd asked a good accountant for advice, he'd have advised you to make the pension contribution from your company so as to save corporation and dividend tax, even if you had the excess funds. CT and DT combined are greater than the tax relief on the pension.

How would that work? I’d still have £9.5K sitting in a low interest savings account. Instead, I have £12K in my pension pot.

I wasn’t in a position to commit company funds then (contract was ending in March) but can now. And I can save the CT tax now (by using the remainder of last years pensions allowance) and I’ll not paying any more than 7.5% dividend tax, so I’m not sure what saving could have been there?

[Cirrus]

or did you just reply to make some noise?

Not really. Your original question was just too long and boring. I thought something simple might throw a different light on things but if you feel you understand the situation then fine.

[Paralytic]

Not really. Your original question was just too long and boring. I thought something simple might throw a different light on things but if you feel you understand the situation then fine.

Thanks for at least admitting that you ignored my question and instead answered a simpler one that was within your capabilities.

Next time, if a few paragraphs is too much for you to digest, perhaps just move on? Thankfully, someone else helpfully confirmed my thinking on the actual question.

[WordIsBond]

How would that work? I’d still have £9.5K sitting in a low interest savings account. Instead, I have £12K in my pension pot.

I wasn’t in a position to commit company funds then (contract was ending in March) but can now. And I can save the CT tax now (by using the remainder of last years pensions allowance) and I’ll not paying any more than 7.5% dividend tax, so I’m not sure what saving could have been there?

If you couldn't commit company funds then, that would have complicated it.

But you could have loaned the funds to your company, and then made the contribution from your company.

It's not an immense savings as long as you are staying out of the higher rate band.