Employer's pension contributions

[ASB]

It might be worth mentioning that employer contributions are not necessarily the best. It does depend upon individual circumstances - there are limited occasions when it is better to take the hit for CT and "dividend tax" in order to end up slightly ahead with what is in the pot for the same amount of "gross money" into the company. It can be worth a good search if somebody is considering a maxing strategy. However it does need very specific circumstances for the best not be company contributions. If the case of IR35 caught it is probably inevitable that company contributions will be a lot more effective.

Also if you are old enough immediate vesting can be a potentially lucrative strategy.

[centurian]

It might be worth mentioning that employer contributions are not necessarily the best.

Yes, it stacks up much better if you are caught by IR35 as the total tax on the portion of your income that you are paying the contributions from is roughly 50% (assuming you are well into the 40% bracket).

If you're outside IR35, then the employer/employee difference isn't as great -unless HMRC nails you for IR35, in which case the employers contributions will be treated as such when they recalculate the due tax - a silver lining at best though...

[Freelancer Financials]

Withdrawing the retained profit from your company

It might be worth mentioning that employer contributions are not necessarily the best. It does depend upon individual circumstances - there are limited occasions when it is better to take the hit for CT and "dividend tax" in order to end up slightly ahead with what is in the pot for the same amount of "gross money" into the company. It can be worth a good search if somebody is considering a maxing strategy. However it does need very specific circumstances for the best not be company contributions. If the case of IR35 caught it is probably inevitable that company contributions will be a lot more effective.

Also if you are old enough immediate vesting can be a potentially lucrative strategy.

I agree, in limited and specific circumstances you can take this approach.

Pension contributions are undoubtedly tax efficient whether you are caught by IR35 or outside. But if you do not wish to utilise all the company’s profits in this way you can also consider other tax effective strategies for withdrawing the retained profit from your company. Under the correct circumstances you can distribute funds on dissolution of a company by way of a capital distribution [extra statutory concession C16]. Combined with entrepreneur relief profits withdrawn in this way attract 10% personal tax rate. The effective rate of tax is even less if annual capital gains tax allowances are otherwise unused.

Once again, I stress that this approach needs to be approved and supported by your accountant.

John

[GreenerGrass]

I make company contributions to my SIPP via Hargreaves Lansdown through a monthly direct debit and it is a really excellent way to build up a pension pot IMO. The money is IR35 proof too as a bonus.

Same here, I find it better than lump sums as you can then automate everything and find less reasons to spend the money on something else.
But at the moment I limit pension contributions to match my NMW-ish salary.
If I wanted to double my company pension contributions (so they are double my company salary but still only a quarter of total company profit) is this considered "taking the piss" by HMRC or not?

[Freelancer Financials]

Same here, I find it better than lump sums as you can then automate everything and find less reasons to spend the money on something else.
But at the moment I limit pension contributions to match my NMW-ish salary.
If I wanted to double my company pension contributions (so they are double my company salary but still only a quarter of total company profit) is this considered "taking the piss" by HMRC or not?

That should be fine. The annual amounts must simply not be very much larger than your actual declared annual corporate income.

John

[thunderlizard]

Blimey thanks Mr Freelancer Financials for giving up your Friday and Saturday nights to answer my question of 5 years ago

In the event we didn't set up any employer contributions. Accountant didn't reckon there was much tax difference either way - both then, and again a couple of months ago.

Thanks for the other replies too, I hope it's thrown up some useful info for others.

tl

[worzelGummidge]

For reference, my wage is £1,000 per month and my pension contribution is £605 per month. This seems to be Ok, well no one has said anything about it during the last two years.

[ASB]

I agree, in limited and specific circumstances you can take this approach.

Pension contributions are undoubtedly tax efficient whether you are caught by IR35 or outside. But if you do not wish to utilise all the company’s profits in this way you can also consider other tax effective strategies for withdrawing the retained profit from your company. Under the correct circumstances you can distribute funds on dissolution of a company by way of a capital distribution [extra statutory concession C16]. Combined with entrepreneur relief profits withdrawn in this way attract 10% personal tax rate. The effective rate of tax is even less if annual capital gains tax allowances are otherwise unused.

Once again, I stress that this approach needs to be approved and supported by your accountant.

John

I'd take a bit of issue with "pensions are undoubtedly tax efficient". Certainly they appear so on the surface, but if one considers isas etc - at least to the level it is possible to contribute - then these are also tax efficient. In effect with a pension offers tax deferment - because the return is largely taxed at the point of receipt. If effect if you are tax at the same rate in retirement as you are in work then it is broadly neutral. If you were a normal rate taxpayer in work and a higher rate payer in retirement then it could be to your detriment. However, the benefit of age allowances and the 25% tax free sum does tend to put the benefit on pensions. It would be unusual - but possible - for an individual in specific circumstances uses other asset classes to fund retirement options.

The real saving, in my view, with pension contributions comes from NI savings. And that if of particular importance to anybody who is IR35 caught. Of course that requires corporate contributions.

Ultimately a case can be made for using full ISA allowance and pension after. But it all depends upon the individual. Certainly anybody intending to contribute large amounts really should consider all their options with a good IFA.

Treatment of pension on divorce can also be a consideration. In general if an asset is liquid - e.g. those ISAS's - then it's value will simply be chucked in the marital pot and split according to what decreed fair or negotiated. Pensions can be, in many ways, treated more favourably to their nominal owner on divorce. It is quite common for something considerably less than the transfer value (or in the case of occupational schemes more than the CETV) to be considered as marital asset.

A further advantage of pension of other assets is that they are not generally included in means testing of benefit, thus should one have to throw oneself at the mercy of the state you will get nothing until you have basically spent all the ISA.

Whilst there are disadvantages with pensions in terms of what you can actually do with them at retirement for most people the advantages probably overrule this.

[Freelancer Financials]

For reference, my wage is £1,000 per month and my pension contribution is £605 per month. This seems to be Ok, well no one has said anything about it during the last two years.

You will have absolutely no problem with that. By the way you can contribute up to your total pre-taxed earings.

[Freelancer Financials]

I'd take a bit of issue with "pensions are undoubtedly tax efficient". Certainly they appear so on the surface, but if one considers isas etc - at least to the level it is possible to contribute - then these are also tax efficient. In effect with a pension offers tax deferment - because the return is largely taxed at the point of receipt. If effect if you are tax at the same rate in retirement as you are in work then it is broadly neutral. If you were a normal rate taxpayer in work and a higher rate payer in retirement then it could be to your detriment. However, the benefit of age allowances and the 25% tax free sum does tend to put the benefit on pensions. It would be unusual - but possible - for an individual in specific circumstances uses other asset classes to fund retirement options.

The real saving, in my view, with pension contributions comes from NI savings. And that if of particular importance to anybody who is IR35 caught. Of course that requires corporate contributions.

Ultimately a case can be made for using full ISA allowance and pension after. But it all depends upon the individual. Certainly anybody intending to contribute large amounts really should consider all their options with a good IFA.

Treatment of pension on divorce can also be a consideration. In general if an asset is liquid - e.g. those ISAS's - then it's value will simply be chucked in the marital pot and split according to what decreed fair or negotiated. Pensions can be, in many ways, treated more favourably to their nominal owner on divorce. It is quite common for something considerably less than the transfer value (or in the case of occupational schemes more than the CETV) to be considered as marital asset.

A further advantage of pension of other assets is that they are not generally included in means testing of benefit, thus should one have to throw oneself at the mercy of the state you will get nothing until you have basically spent all the ISA.

Whilst there are disadvantages with pensions in terms of what you can actually do with them at retirement for most people the advantages probably overrule this.

But it all depends upon the individual. Certainly anybody intending to contribute large amounts really should consider all their options with a good IFA.

This is true whether it is for large or small amounts. I agree with a lot of what you have said, especially the part about treatment of pension on divorce.

However, overall Pensions are still the most tax effient investment vehicle available to contractors.

I always use this example when explaining the process to clients:

Tax Relief - How It Works

Let's say you are a contractor with a limited company, not caught by IR35, and you are a higher rate tax payer. You'll probably be taking a low salary, and drawing the rest of your income in dividends.

For £100 of company gross profit: when you pay dividends, first you pay corporation tax of 21% (£21) leaving a dividend of £79. Then you pay further tax on the dividend of 22.5% (£17.78), leaving you with £61 in your pocket. You've just paid the Revenue £39 for the privilege of having £61 in your hand now.

But if you contribute to your pension: Instead of taking £61 now, the company makes a £100 contribution to your pension. In reality £25 of your contribution represents the part of the pension fund which you can draw tax free when you are retire - it also has the opportunity to grow and be worth considerably more than this initial investment. £36 pounds also go into the pension fund, together with the £39 that would have gone to the taxman (quite a decent return). This £75 can also grow and be used to skim off an income at a later date, or buy an annuity.

This is what it means to say you get 39% tax relief. It's the percentage of tax saving you get - the amount you can channel to your pension, rather than the tax man. And remember, all that money invested starts earning interest straight away. For higher rate contractors caught by IR35, the tax relief is 48%.

John Yerou