Pension Contibutions - Personal vs Comapany Contribution

[IR35 Avoider]

I can see that if the companies total fees after expenses were less than five or six thousand pounds per year, there could be a case for a personal contribution, assuming you wanted to contribute in those circumstances. However that's a fairly extreme example. If your company has at least £1000 above that level to be disposed of as either salary, pension contribution or profit (dividend) then the dividend plus personal contribution route results in 1% more tax than the company contribution route.

[pmeswani]

Ah. I have not often thought of 40% tax as a happy circumstance

Normally it isn't. But if one puts themselves in that situation... they might as well use it to their advantage.

[minstrel]

Hence why I recommend the 2-tier approach... The employer and employee contributions. If it turns out that you are paying 40% on your salary... happy days.

But why would you be paying 40% on your salary if you are a typical ltd contractor paying small salary and high dividends.

The only way I could see a contractor paying 40% is if they were inside IR35 and paying a high salary, in which case the NI contributions would kick in and make personal contributions much less attractive.

There could be a scenario where you have non-ltd income which puts you into higher rate band e.g. PAYE income from a permie job in the same tax year, but I'd see that as an exceptional situation.

[pmeswani]

But why would you be paying 40% on your salary if you are a typical ltd contractor paying small salary and high dividends.

The only way I could see a contractor paying 40% is if they were inside IR35 and paying a high salary, in which case the NI contributions would kick in and make personal contributions much less attractive.

There could be a scenario where you have non-ltd income which puts you into higher rate band e.g. PAYE income from a permie job in the same tax year, but I'd see that as an exceptional situation.

It depends on the short and long term objectives. Not everyone is in the contract market for the sole reason of being tax efficient. For me, being tax efficient is pretty much a non-brainer. For some people it's not necessarily a consideration. However, I do detract from the main point of the thread and still say that my two-tier approach is a consideration for some.

[minstrel]

It depends on the short and long term objectives. Not everyone is in the contract market for the sole reason of being tax efficient. For me, being tax efficient is pretty much a non-brainer. For some people it's not necessarily a consideration. However, I do detract from the main point of the thread and still say that my two-tier approach is a consideration for some.

OK - I accept that sometimes it's not all about saving tax. However, the OP's question was all about tax efficiency.

What short or long term objectives could one have that makes making personal contributions a better idea?

I'm genuinely interested to know, to make sure I haven't missed anything.

[pmeswani]

OK - I accept that sometimes it's not all about saving tax. However, the OP's question was all about tax efficiency.

What short or long term objectives could one have that makes making personal contributions a better idea?

I'm genuinely interested to know, to make sure I haven't missed anything.

I did not say personal contributions was a better idea against employer contributions in all circumstances, so please can you accept that?

All I have said throughout is that making BOTH employer AND personal (whether it is via employee contributions or from ones personal bank account) was a good idea. I have NEVER said one OR the other is best. Contributions from both sides have tax benefits. Yes, Employer contributions (for those on basic tax bracket) is better. That's a no-brainer and have never argued against that. All I have said it is better to make employer AND employee (either direct from the business account or personal contributions from ones personal account) contributions.

I for one don't always accept that the only contributions that should be made is from the employer. Making contributions on both levels is beneficial from a tax perspective, even if one outweighs the other by a mere 1%. Belts and braces approach is sometimes beneficial.

Just out of interest... if the government were to cut the Corp Tax by 1% or more, would you still advocate that employer contributions are the only way forward? (BTW, I am not saying that the Govt. would cut the Corp Tax by any amount).

If I were ever to fall into the 40% tax bracket, I would still make contributions from both employer and employee.

But to answer the OP question (which I think I have answered already) it may be worth while making contributions as an employee and an employer. An additional contribution will be made on the employee contribution to the pension by HMRC.

*** Disclaimer: The additional contribution by the HMRC may depend on the type of pension taken out. Apology for not stating this earlier.

[minstrel]

I did not say personal contributions was a better idea against employer contributions in all circumstances, so please can you accept that?

I accept that you have not said that. But what you have said is:

All I have said throughout is that making BOTH employer AND personal (whether it is via employee contributions or from ones personal bank account) was a good idea.

and that is what I'm saying is I disagree with. There are very few circumstances where it is a good idea to make any personal contributions.

Just out of interest... if the government were to cut the Corp Tax by 1% or more, would you still advocate that employer contributions are the only way forward? (BTW, I am not saying that the Govt. would cut the Corp Tax by any amount).

Of course not. If the tax rates change then clearly that will affect whether or not it is better to make personal or company contributions. You'll see in previous threads in tax years when CT was 19% and basic rate tax was 22% I've argued that personal contributions were most tax efficient.

If I were ever to fall into the 40% tax bracket, I would still make contributions from both employer and employee.

If you are in 40% tax bracket then you are not a contractor working outside of IR35 paying low salary, high dividends so are in a completely different tax position.

But to answer the OP question (which I think I have answered already) it may be worth while making contributions as an employee and an employer. An additional contribution will be made on the employee contribution to the pension by HMRC.

As I've said, it's highly unlikely to be most efficient to make any personal contributions. Either show me a worked example with figures where it is better to make personal contributions or accept that in the vast majority of situations it's better to make only company contributions and not a mixture of both.

[pmeswani]

As I've said, it's highly unlikely to be most efficient to make any personal contributions. Either show me a worked example with figures where it is better to make personal contributions or accept that in the vast majority of situations it's better to make only company contributions and not a mixture of both.

We will have to agree to disagree on this topic. I don't have any hardcore evidence to suggest personal contributions are more tax efficient as I don't have time to create a working document to prove my case...

However, In my view, I am happy to go down the route of both as it would create certain benefits on both counts (with more benefit, currently, from the employer contributions...). As you don't believe making personal contributions are worth it, then I respect your opinion. However, my views make sense to me from both a corporate tax perspective and from a personal tax perspective. Depending on which benefits you wish to look at, one has to make the decision at what is best for the individual and for the company.

[minstrel]

We will have to agree to disagree on this topic. I don't have any hardcore evidence to suggest personal contributions are more tax efficient as I don't have time to create a working document to prove my case...

However, In my view, I am happy to go down the route of both as it would create certain benefits on both counts (with more benefit, currently, from the employer contributions...). As you don't believe making personal contributions are worth it, then I respect your opinion. However, my views make sense to me from both a corporate tax perspective and from a personal tax perspective. Depending on which benefits you wish to look at, one has to make the decision at what is best for the individual and for the company.

In the red corner we have IR35 Avoider who has made the case that company contributions are more tax efficient, spent some time doing calculations, prepared a worksheet to share his working and opened it up for peer review.

In the blue corner we have pmeswani who argues that making company and personal contributions is a good idea, but can't give any examples, has no hardcore evidence and doesn't have time to prove their case.

To be honest pmeswani, I think it's very poor form to get involved in a thread, cast doubt on what someone is saying and then not back it up.

Debate is good, and it's right to challenge or correct people when they are wrong. But as expat pointed out, this isn't a matter of opinion it's a matter of arithmetic.

If you don't have the time or ability to do the sums, don't get involved in an arithmetic debate. If you are saying their are other issues/risks that need to be taken into account other than the maths, then you should state what they are.

[THEPUMA]

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.

I can't ignore a challenge like that. I haven't thought of one yet but a pound says I can think of a really obscure scenario in which personal contributions are better.

PUMA