Pensions Pensions Pensions

[SackmanandCo]

It costs approx 41% to extract monies from a limited comapny

[lje]

A company pension scheme is normally better than a private one because Company gets tax relief at 21% plus avoid personal tax on dividends of 20% whereas private contributions are paid out of net income

Private contributions may be paid out of net income but then the tax is claimed back (by a combination of the pension company themselves (up to the 40% tax band) and personally in your self assessment (for any extra tax relief of you are in the 40% tax band).

So it all works out the same... In theory... In actual fact the difference is that if you pay it from personal income then you have payed employer's and employee's national insurance on the money (assuming you have a high enough salary to have to pay these).

It is also worth noting that up to the 40% tax band there is no extra tax payable on the net dividends received from your limited company. Anything over the 40% limit but under the 50% limit you have to pay an extra 22.5% of the gross dividend amount. Anything over the 50% limit you have to pay an extra 32.5% of the gross amount.

[Clare@InTouch]

It costs approx 41% to extract monies from a limited comapny

How are you getting 41%?

[Robot]

Just a thought

Although you get tax relief on the way, you pay tax when you withdraw it as a pension pot (bar the 25% lump sum).

You know the tax savings now but you have no idea of the amount of tax you will pay when you draw down your pension.

Why not keep the money in the company, when you retire and you can draw down your BRB year on year until the reserves in the company have gone, plus you have instant access to the funds if you require it, you don’t have that option with a pension.



Robot

[Fred Bloggs]

I prefer to keep the minimum to cover taxes etc in the Ltd Co account as a rule. I draw divs and a small salary up to the 40% threshold, the rest of the turnover goes into my SIPP from the Ltd Co.

[SackmanandCo]

How are you getting 41%?

100-21=79
79-19.75=59.25

=tax of 40.75%

[Clare@InTouch]

100-21=79
79-19.75=59.25

=tax of 40.75%

So if you have a turnover of £100 and pay CT of £21 - that leaves a profit of £79.

If you're below higher rates you can withdraw that as a dividend - 0%
If you're in the basic rate band it will be 32.5% - less the tax credit - 22.5%
If you're in the additional rate band it goes up to 42.5%

Income tax is 20% 40% or 50%.


What's your 19.75%?

[SackmanandCo]

£79 dividend in cash terms is taxed at 25% for a higher rate tax payer. Dont worry about tax credits- us accountants talk too technical

[Clare@InTouch]

£79 dividend in cash terms is taxed at 25% for a higher rate tax payer. Dont worry about tax credits- us accountants talk too technical

Right - so you're assuming that it's a higher rate taxpayer. Personally I don't think you can apply an overall rate on the assumption that all income is taxed at higher rates because it takes no account of income at lower rates, so is misleading for clients.

Your example was £100 income less £21 CT = profit of £79. 25% higher rate tax = £19.75.

How does that give a 40.75% tax rate? 21% CT plus 25% IT = 46%.

Adding the CT rate to the actual tax suffered in higher rates gives a mixed percentage/£ figure of 40.75.

[pmeswani]

£79 dividend in cash terms is taxed at 25% for a higher rate tax payer. Dont worry about tax credits- us accountants talk too technical

Sorry for interfering in this interesting debate between you and *Clare*. But what are you basing the higher rate tax payer on? Are you advising your clients to take a higher rate of pay + Dividends? If so, please can you advise us of your rationale? I appreciate that being on a higher rate of pay has benefits from a pension point of view, but what other rationale?