Pensions Pensions Pensions

[MrC]

I work on the basis that any money put into a pension will be taxed at 15% on average.

That's a nice rule of thumb.

Money passed as dividends (within the basic rate band) and put into an ISA will have been taxed at 21%, or possibly more in future, as small company Corporation tax is heading upwards.

Sure, although you can always revert to the pension option at that point.

A big advantage of pensions is that they innoculate you against HMRC coming along in a few years time and deciding all you contracts were IR35 caught, and charging you twenty-something percent NI, and possibly higher rate tax, on money that could have been taxed at 15% or less, had you done things differently.

If the money is in fact being saved for spending after the age of 55, then for contractors it's a no-brainer that the pensions route is better.

IR35 safe - Yes that is a huge potential advantage. Pension better - yes, allowing for the caveats already mentioned by DonkeyRhubarb.

How much to contribute this year depends on your own circumstances more than anything else. I doubt an IFA will be much help. (But they will effectively charge you thousands of pounds for not helping.)

Yes i think i've got to take an educated guess. I think i'd be better to slightly overdo the pension as a contractor and then undercook it in future years when maybe i turn permie through choice or total IR35 enforcement as i can save of corporation tax that way.

IR35 Avoider - you're a star Thanks for your lengthy and thorough response, detailed insights into the SIPPs vs Insurance companies, how to make contributions and thanks for giving up your lunchtime to do so.


Based on what i've learnt here i'm going put everything sub higher rate tax, in the following order, into:
spending,
ISA,
warchest
then funds that would put me into higher rate straight into a SIPP.

Thanks for all the advice guys and girls. Much appreciated. Virtual beers all around

[MrC]

Final few questions:
-Lets say then that i earn (and declare on my personal tax return) 43K this year (sal+divs) and so am just under my higher rate threshold. If i then transfer £5K from company into a SIPP, do i have to declare this on personal tax return and am i a higher or lower rate taxpayer?

-If i arrange a SIPP and pay in through company can i also transfer in from other existing pension schemes or does this violate the (company contributions rule)?
And even if not is it likely to confuse the SIPP provider and get me in hot water that way?

-Lastly I have read all about not setting your pension to be significantly more than your salary. Does anyone know - is this within your companies or the tax fanancial year?

[IR35 Avoider]

Final few questions:
-Lets say then that i earn (and declare on my personal tax return) 43K this year (sal+divs) and so am just under my higher rate threshold. If i then transfer £5K from company into a SIPP, do i have to declare this on personal tax return and am i a higher or lower rate taxpayer?

Provided it's a company contribution you don't mention it on your tax return, it has no effect on your current year's personal tax. (It is tax deductible to the company in the current year, and you may pay personal tax on the money in some future year when you draw your pension.)

-If i arrange a SIPP and pay in through company can i also transfer in from other existing pension schemes or does this violate the (company contributions rule)?

Transfers are not contributions. Issues surround contributions, such as personal versus company, or limits on contributions, or current year tax consequences all do not apply.

And even if not is it likely to confuse the SIPP provider and get me in hot water that way?

Pension providers know how to deal with transfers, and know the difference between a transfer and a contribution.

-Lastly I have read all about not setting your pension to be significantly more than your salary. Does anyone know - is this within your companies or the tax fanancial year?

You're not allowed to make personal contributions that are more than 100% of your gross salary, since the rule affects personal contributions I guess it's the tax year that applies, but all that should be irrelevant as it should be a company contribution, and there's no limit to the size of a company contribution.

To give an example, if you earn 100K from an IR35-caught contract you could spend 5K on company expenses, 5K on salary and put 90K in a pension as a company contributions, and pay no Corporation Tax, income tax or NI, if that's what you wanted to do. (And assuming you can live on 5K of course.)

[THEPUMA]

A couple of points that I've not seen so far:-

If we assume that the money can go into a pension, then it follows that you don't need it to live on. It therefore follows further that you don't need to draw it out as a dividend and pay higher rate tax on it. Instead you can leave it in the company until closure and pay (under the current capital gains tax regime at least) 10% tax on the eventual distribution.

So your marginal effective tax rate is 28.9% (the combination of 21% CT and 10% CGT). This could change your decision in respect of pensions versus other investments at the margin.

Personally, I am going to use my and my wife's ISA allowances then max out her pension contributions eligible for higher rate tax relief before considering a pension contribution on my own behalf. I may also use surplus company funds to offset my mortgage.

One downside to this is that we could end up with my wife being a higher rate taxpayer in retirement but with me being a basic rate taxpayer, which would obviously be tax-inefficient. But I have many years to manage this potential problem.

Further support for this logic is that I may well revert to being a traditional higher rate taxpayer sometime between now and retirement, at which point I will hopefully be able to achieve at least 40% tax relief on my pension contributions as opposed to 28.9%.

PUMA

[IR35 Avoider]

A couple of points that I've not seen so far:-

If we assume that the money can go into a pension, then it follows that you don't need it to live on. It therefore follows further that you don't need to draw it out as a dividend and pay higher rate tax on it. Instead you can leave it in the company until closure and pay (under the current capital gains tax regime at least) 10% tax on the eventual distribution.

So your marginal effective tax rate is 28.9% (the combination of 21% CT and 10% CGT). This could change your decision in respect of pensions versus other investments at the margin.

You can possibly do even better than that, if you pay out the money as dividends in future years when some of your basic rate band is otherwise unused, that way you never pay more than 21% on the money.

I did this with money earned before IR35 was introduced. IR35 does complicate things for contractors, because you have to take into account the risk that you will be found to be wrong about money you assessed as not caught.

[escapeUK]

[QUOTE=lje;1094017 Currently this NS&I product would pay 4.7% tax free - which is much higher than any cash ISAs I know of.[/QUOTE]



Ok you made me more interested when you said 4.7% and tax free.

I'll ask my wise old Auntie what she thinks.

[MrC]

A couple of points that I've not seen so far:-
Instead you can leave it in the company until closure and pay (under the current capital gains tax regime at least) 10% tax on the eventual distribution.

You obviously didn't read 4) of my original post. "Also would a pension compare favourably to any benefit derived from CG of company closure/entreprenuers relief? "
Admitely it was a pretty long post

[MrC]

Provided it's a company contribution you don't mention it on your tax return, it has no effect on your current year's personal tax. (It is tax deductible to the company in the current year, and you may pay personal tax on the money in some future year when you draw your pension.)

That I like. For some reason i'm feeling precious about not being a HR taxpayer.

Transfers are not contributions. Issues surround contributions, such as personal versus company, or limits on contributions, or current year tax consequences all do not apply.

Pension providers know how to deal with transfers, and know the difference between a transfer and a contribution.

Also good to hear.

You're not allowed to make personal contributions that are more than 100% of your gross salary, since the rule affects personal contributions I guess it's the tax year that applies, but all that should be irrelevant as it should be a company contribution, and there's no limit to the size of a company contribution.

That makes sense. For anyone unsure about this i found this thread from post 50 onwards aided my understanding.

Thanks again IR35 Avoider!

[richy]

Is there any particular reason for this order?

I have ISA from previous year but these will doubtless be raided when i come to get onto the 1st rung of the property ladder. I'm really interested though in whats going to be most finanacially beneficial in the long run.

That's the thing about pensions.. if you are doing your own thing and managing your own "pension pot" as ISA's you cant go raid them!

I'd say you can raid them if you are buying a property for long term investment, if it's at a bargain price and in a great location.

I manage my own "pension pot" rather than using a SIPP etc.. got a mortgaged place I let out. in 20yrs when mortgage is paid off that will be my pension income each month!

[swebb]

Ok guys let me get this clear.

If I pay myself say 12K a year I was under the impression that my company can't pay more than 12K into my SIPP. However from what I read here the company can pay more than my salary into the SIPP, right ? Also does dividend payments have any impact other than taking my into a higher rate band?

Thanks

Steve