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Pension Contibutions - Personal vs Comapany Contribution

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    #51
    Originally posted by Lewis View Post
    If you are a 40% tax payer:

    2008/9 Corporation tax @ 21% = £210
    Allows £790 dividend to be paid (£877.78 gross dividend, i.e 790/0.9)
    Tax paid on dividend = £877.78 * 0.225 (32.5% - 10% tax credit) = £197.50
    That leaves £595 to pay into the pension
    Pension + Tax relief = £595 @ 22.5% = 595/0.775 = £767.74

    So you are even worse off.
    You posted this while I was composing my similar example.

    Remember that one of the original conditions of the problem was that the amount ending up in the pension had to be the same either way. In other words, a £800 net contribution (subsidised from other income) should be made in your example.

    The reason I say there is an advantage is because there is nothing in the tax return that links the treatment of the extra dividend income to the treatment of the extra pension contribution. The extra dividend income increases the amount taxed at the higher rate by £878, but a £800 net (£1000 gross) pension contribution decreases it by £1000. Assuming the difference of £122 is dividends on which extra higher-rate tax of 22.5% would have been paid, you save 22.5% * £122 = £28, but you had to make up the difference between £800 pension contribution and £790 dividend with £10 other money, so overall you are only £18 better off.
    Last edited by IR35 Avoider; 25 November 2008, 14:42.

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      #52
      I have updated the spreadsheet to incorporate the latest corrections. Although you can't update it directly to try your own scenarios, I think you can save a copy to a local drive in Excel format. Even if you don't have Excel, other spreadsheets might be able to read the file. (One would hope a free Google documents account would, as that's where it's coming from.)

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

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