Pension Contibutions - Personal vs Comapany Contribution

[glashIFA@Paramount]

Thanks for the replies and links to the previous threads, though there still seems to be some diffference of opinion on this matter In my case my personal contribution comes from dividend earnings, so not subject to NI. I'm also a higher rate tax payer, so recieve higher rate tax relief on my personal contribution. In this case should I continue with contributing personally or start contributing through the company and reduce my dividend payout.

If your income is small salary and large divis i presume you spend it all which is the reason you take divis at the level to push you into higher rate tax. The threshold for higher rate tax is £34,800, the first part being taken up by salary and the rest by divis. Any divis over this is taxed at 32.5%. Making a personal contribution to a pension has the effect of widening the tax thresholds. In other words if you pay £500 per month into a pension thats £6k pa which means higher rate tax isn't charged on your divi income until your total income exceeds £40,800, so the tax relief for a higher rate taxpayer with mainly divis is actually an additional 12.5% (32.5% less the 20% basic rate relief at source on the contribs.). if your income was all salary then the additional relief would be 20% (40% less the 20% at source).

Divis are not pensionable income so it's worth remembering that if you make personal contribs then they cannot exceed the part of your income that is represented by salary if you want to claim tax relief.

If it's a company contrib then the relief as you know is corp tax. Pension contribs made by an employer are deemed part of pensionable remuneration and,as such wil be allowable for relief.

if you stop the personal contribs it will mean you could take less divi and thus avoid an element of higher rate tax on your income.

[jonb2010]

To make a payment into a pension from my Ltd company (as opposed to a payment from my personal account after deductions etc) do I need to have a specific type of pension or will a stanard pension suffice ?

[Fred Bloggs]

To make a payment into a pension from my Ltd company (as opposed to a payment from my personal account after deductions etc) do I need to have a specific type of pension or will a stanard pension suffice ?

I recommend you look at a low cost SIPP, plenty out there. HTH.

[IR35 Avoider]

I will make this as simple as I can. No contractor with their own company should make personal contributions. There are currently no circumstances where the overall tax paid will be lower if pension contributions are made by the individual rather than his/her company.

By overall tax I mean the total of corporation tax, income tax and employers and employees national insurance.

I challenge anyone to prove me wrong. Any examples in which gross salaries or total amounts ending up in the pension are not identical in both scenarios will be disqualified for not comparing like with like.

This spreadsheet shows an example. (I think you will have to export it to have a copy you can play with. Only change the amounts in blue.)

http://spreadsheets.google.com/ccc?k...gEGgLOX0wPZ0UQ

[pmeswani]

I will make this as simple as I can. No contractor with their own company should make personal contributions. There are currently no circumstances where the overall tax paid will be lower if pension contributions are made by the individual rather than his/her company.

By overall tax I mean the total of corporation tax, income tax and employers and employees national insurance.

I challenge anyone to prove me wrong. Any examples in which gross salaries or total amounts ending up in the pension are not identical in both scenarios will be disqualified for not comparing like with like.

This spreadsheet shows an example. (I think you will have to export it to have a copy you can play with. Only change the amounts in blue.)

http://spreadsheets.google.com/ccc?k...gEGgLOX0wPZ0UQ

In your spreadsheet, you imply that a person will pay themselves above their tax free threshold. I for one don't pay myself more than £5400. The rest of my income is in dividends. Yes it is more tax efficient to pay from the company, and I do make the occasional one-off payments from my company (as employer contributions) and monthly contributions from my personal account. For me, there is no loss in Nic contributions.

[IR35 Avoider]

The specified salary and contributions are just random examples to illustrate a point. The spreadsheet is there to be copied so people can put their own figures in.

Since we are discussing personal versus company contributions, it doesn't help to assume a low salary, as then we'd also then have to assume a low pension contribution, since personal contributions aren't allowed to be more than 100% of salary. An example with a higher pension contribution (which requires a higher salary for the personal contribution case) makes the discrepancy in tax paid clearer.

[pmeswani]

The specified salary and contributions are just random examples to illustrate a point. The spreadsheet is there to be copied so people can put their own figures in.

Since we are discussing personal versus company contributions, it doesn't help to assume a low salary, as then we'd also then have to assume a low pension contribution, since personal contributions aren't allowed to be more than 100% of salary. An example with a higher pension contribution (which requires a higher salary for the personal contribution case) makes the discrepancy in tax paid clearer.

Ironic. I am actually contributing more into my pension since I became a contractor than I had when I was a permie. If I wanted to contribute more than my salary, then I would increase my salary to match. However, I still maintain that a 2-tier approach is just as valid as a one-tier approach. Yes, there are benefits of just doing Company contributions (lower Corp tax would be the major factor and nic contributions for those who it applies to), but there are certain tax advantages for those who pay themselves £450 a month to make personal contributions.

[minstrel]

Ironic. I am actually contributing more into my pension since I became a contractor than I had when I was a permie. If I wanted to contribute more than my salary, then I would increase my salary to match. However, I still maintain that a 2-tier approach is just as valid as a one-tier approach. Yes, there are benefits of just doing Company contributions (lower Corp tax would be the major factor and nic contributions for those who it applies to), but there are certain tax advantages for those who pay themselves £450 a month to make personal contributions.

Can you give us an example where making a contribution personally is more tax efficient than making it via the company?

I'm with IR35 Avoider. As I see it, company contributions are definitely more tax efficient than personal contributions. Happy to be proved wrong though if you can back it up with an example.

[pmeswani]

Can you give us an example where making a contribution personally is more tax efficient than making it via the company?

I'm with IR35 Avoider. As I see it, company contributions are definitely more tax efficient than personal contributions. Happy to be proved wrong though if you can back it up with an example.

I didn't say say that making personal contributions are more tax efficient. I said there are advantages to making personal contributions as well, especially when you pay yourself just below the NIC and Tax levels.

[minstrel]

I didn't say say that making personal contributions are more tax efficient. I said there are advantages to making personal contributions as well, especially when you pay yourself just below the NIC and Tax levels.

Ah - ok. Just wondering why you still advocate a "2-tier approach" (which I assume you mean to be making personal and company contributions).

Are there any other advantages to making personal contributions? If you're accepting company contributions are more tax efficient I can't understand why you would advocate making personal contributions too?