Quick pension query

[psychocandy]

It's a pain. I do see their logic to some extent, since whether it is allowable for CT is dependant upon things that might yet happen in the current year.

The full wording that Bradley posted should be:-

"You should accept that the contributions are paid wholly & exclusively for the purposes of the trade where the remuneration package paid in respect of a director of a close company, or an employee who is a close relative or friend of the director or proprietor (where the business is unincorporated) is comparable with that paid to unconnected employees performing duties of similar value. When there are no employees with whom duties are genuinely comparable, you should follow the general guidance at BIM47105."

This only actually implies that it is definite acceptable if there is another employee with the same package.

BIM47105 (which strictly only applies to close relatives and dependants so it is badly phrased in the guidance above) states:-

"In this situation, you should consider whether the amount of the overall remuneration package, that is the combined salary, wages, benefits and pensions contributions, was paid wholly and exclusively for the purposes of the employer’s trade."

In terms of a controlling director in order to fail this HMRC would need to make a case that they can limit the amount of remuneration a business owner can receive. I think they would struggle with this.

You may find this eases any worries you might have:-

Employer contributions and tax relief



I am not quite sure why you are checking the 100% employee limit since you were referring to employer contributions (just being thorough possibly or maybe I have missed the point). However these might help:-

From Craigs link on employEE contributions:-

"Limits on tax relief
You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension from which you benefit from tax relief is subject to an 'annual allowance'. The annual allowance amounts for the current and previous two tax years are shown below."

This seems to me pretty clear for employee contributions, remember dividends don't count towards pensionable income [So in order to get the personal income to contribute it must have suffered both lots of NI and income tax first]

Sorry to jump in on this thread but I notice that personal contributions are limited to 100% of your earnings (NOT just salary). So its the same as if the contributions are from the company. (although both are limited to the £50K thing).

[ASB]

Sorry to jump in on this thread but I notice that personal contributions are limited to 100% of your earnings (NOT just salary). So its the same as if the contributions are from the company. (although both are limited to the £50K thing).

The issue is the definition of earnings. These are not just salary. I think the phrase that used to be used was "relevant earnings". Dividends weren't. These are unearned income. In effect earnings and taxable income are two different things. I can't find a link in black and white, however:

HM Revenue & Customs: Tax relief on pension contributions

"You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension from which you benefit from tax relief is subject to an 'annual allowance'. The annual allowance amounts for the current and previous two tax years are shown below."

However, you may also like to consider the scenarios put forward here. As ever best routes always depend upon exact circumstances.

Adviser confirmation | Scottish Widows Extranet

[psychocandy]

The issue is the definition of earnings. These are not just salary. I think the phrase that used to be used was "relevant earnings". Dividends weren't. These are unearned income. In effect earnings and taxable income are two different things. I can't find a link in black and white, however:

HM Revenue & Customs: Tax relief on pension contributions

"You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension from which you benefit from tax relief is subject to an 'annual allowance'. The annual allowance amounts for the current and previous two tax years are shown below."

However, you may also like to consider the scenarios put forward here. As ever best routes always depend upon exact circumstances.

Adviser confirmation | Scottish Widows Extranet

Good point - its debatable about dividends then I see which, as you state, could be classed as unearned income. :-(

I'm wondering whether its best just to stick to company contributions where this doesnt apply. After all, even though some say you're not getting the upper rate tax relief here (if you're into upper rate) surely you are because the money getting bunged into a pension is now not available to be paid as a dividend so you;re income is less?

[psychocandy]

The issue is the definition of earnings. These are not just salary. I think the phrase that used to be used was "relevant earnings". Dividends weren't. These are unearned income. In effect earnings and taxable income are two different things. I can't find a link in black and white, however:

HM Revenue & Customs: Tax relief on pension contributions

"You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension from which you benefit from tax relief is subject to an 'annual allowance'. The annual allowance amounts for the current and previous two tax years are shown below."

However, you may also like to consider the scenarios put forward here. As ever best routes always depend upon exact circumstances.

Adviser confirmation | Scottish Widows Extranet

Good examples of how it works in the Scottish Widows link. Basically explaining that if you're paying higher rate you're going to save 42.5% or more by chucking it in a pension.

Only thing is in both these examples, the amount contributed in pension was less than their earned salary. No example where, for instance, salary is £10K, dividends £40K, pension contribution £20K.

[ASB]

Only thing is in both these examples, the amount contributed in pension was less than their earned salary. No example where, for instance, salary is £10K, dividends £40K, pension contribution £20K.

Well no. I rather imagine that is because you can only get relief on contributions upto you salary and other earned income (just call it salary it's easier).

So, the point remains that:-

- you only get relief on contributions up to 100% of salary
- you get relief at your highest marginal rate. This second example is really the point of the sw examples. Thus if you get a salary of 10k and have non qualifying income which pushes you into a higher rate band then you will get relief on upto 10k of pension contributions at your highest rate of tax not at the basic rate. [Save for the restrictions that kick in on high incomes now, think at 130k]

In terms of it being "debatable" about dividends it isn't. They don't qualify as relevant earnings. I can't find a piece of guidance which actually states this explicitly. But see here:-

Technical Pages: Contributions and tax relief: Member contributions: Entitlement to tax relief: Relevant UK earnings

This tells you what is relevant earnings. This is easier than trying to find a link saying what isn't (since it's everything not in there).

This is why, in general, unless there is earned income from elsewhere if contributions in excess are intended to be made these need to be company contributions, if they are not then there is no relief. If salary is increased in order to make those contributions then this is always going to be more expensive because of the NI position on the extra salary.

[psychocandy]

Well no. I rather imagine that is because you can only get relief on contributions upto you salary and other earned income (just call it salary it's easier).

So, the point remains that:-

- you only get relief on contributions up to 100% of salary
- you get relief at your highest marginal rate. This second example is really the point of the sw examples. Thus if you get a salary of 10k and have non qualifying income which pushes you into a higher rate band then you will get relief on upto 10k of pension contributions at your highest rate of tax not at the basic rate. [Save for the restrictions that kick in on high incomes now, think at 130k]

In terms of it being "debatable" about dividends it isn't. They don't qualify as relevant earnings. I can't find a piece of guidance which actually states this explicitly. But see here:-

Technical Pages: Contributions and tax relief: Member contributions: Entitlement to tax relief: Relevant UK earnings

This tells you what is relevant earnings. This is easier than trying to find a link saying what isn't (since it's everything not in there).

This is why, in general, unless there is earned income from elsewhere if contributions in excess are intended to be made these need to be company contributions, if they are not then there is no relief. If salary is increased in order to make those contributions then this is always going to be more expensive because of the NI position on the extra salary.

So it seems. Will clarify this with my accountant.

So, for those of us paying themselves a low salary and high dividends, in effect, you are restricted to £7K (or whatever) of pension payments? Like you said, increasing salary somewhat defeats the object.

Other than that you might as well opt for company funded? Is there any benefit at all of paying £7K personally and, say, £43K via company (or just pay it all via company)?

[ASB]

Some approximate numbers.

Turnover 50k, no expenses etc.

Co. pension contribution = 50k. Total in pension = 50k.

-----------------------------------

Salary 44794, Er's ni = 5206. Total = 50,000

EE's NI = 4277

7475 @ 0% = 0
35000 @ 20% = 7000
2319 @ 40% = 928

Net Income = 32589.

Pension contribution of 32589.

Received by pension company = 32589 + tax relief (20% of gross) = 8147 = 40736
Higher rate relief will be obtained through tax return. This will give 580.

As you see this would end up with about 9000 less in the pension.

-------------------------------------------------

I cant be bothered to do the sums for 7k salary and the rest as a company contribution.

Edit: Actually I will.

[ASB]

The 7k example.

Turnover 50k, no expenses etc.

-----------------------------------

Salary 7072, Er's ni = 0. Total = 0. Still available for company contribution = 42928

EE's NI = 0

7072 @ 0% = 0

Net Income = 7072.

Pension contribution of 7072.

Received by pension company = 7072 + tax relief (20% of gross) = 1768 = 8840

Add 42928 company contribution = 51768

-------------------------------------------------

This is probably "best" because you get relief on money that has never been taxed. You will see that you effectively get the relief of 1768 and this ends up as extra in your pension pot.

Of course this is just my understanding, you will need to tailor it to your position, what you are trying to achieve and validate that it is actually correct.

[psychocandy]

Some approximate numbers.

Turnover 50k, no expenses etc.

Co. pension contribution = 50k. Total in pension = 50k.

-----------------------------------

Salary 44794, Er's ni = 5206. Total = 50,000

EE's NI = 4277

7475 @ 0% = 0
35000 @ 20% = 7000
2319 @ 40% = 928

Net Income = 32589.

Pension contribution of 32589.

Received by pension company = 32589 + tax relief (20% of gross) = 8147 = 40736
Higher rate relief will be obtained through tax return. This will give 580.

As you see this would end up with about 9000 less in the pension.

-------------------------------------------------

I cant be bothered to do the sums for 7k salary and the rest as a company contribution.

Edit: Actually I will.

As you've demonstrated, pointless increasing your salary just to be able to put more in your pension. Much easier to just pay as from the company.

[northernladuk]

As you've demonstrated, pointless increasing your salary just to be able to put more in your pension. Much easier to just pay as from the company.

The light... the light... he has seen the light.........