Best way to pay extra income into pension...

[IR35 Avoider]

I currently pay myself a 12k salary and 28k dividends so any extra income attracts a higher tax rate. I have some extra income coming in as a sole trader, I'd like to put this income into a pension and not pay the higher rate of tax. I was wondering whether there is any difference with the following solutions?

1. Adjust my salary to compensate for the extra income and pay into my pension from my ltd.

Eg, for 3k income as a sole trader:
- Salary from ltd becomes 9k
- 3k sole trader income is taxed as personal income
- 3k is paid into pension from the ltd

2. Keep the salary the same and pay the extra income direct into the pension. With this solution I am also not sure how much I need to pay into the pension. In this instance, does anyone know how much I need to pay into the pension (personally) to offset say 3k income at the higher tax rate?

If there are no difference between the two options then I would prefer option 2 as the extra income would vary from year to year.

I know this is a question for my accountant but he is always conveniently 'in a meeting'.

Thanks in advance!

What I would do in your situation is
1. Reduce salary to 7K regardless of anything else, to save NI.
2. Keep total taxable income just below higher rate by adjusting dividend income as appropriate after taking into account salary and sole trader income.
3. Possibly retain some of the leftover money within the company to use to pay salary and dividends in a bad year or to be distributed when not working. The retained money can be invested.
4. Pay employer pension contributions out of any remaining money.

I would only pay dividends or retain earnings in the company if I were confident of IR35 status. If any doubt, note that pension contributions are insulated against IR35 risk.

[Danielsjdaccountancy]

THEIR

Quite right! Apologies.

[northernladuk]

Quite right! Apologies.

Don't bow down to these damn pedants. Respond with...


their

Incorrect capitalisation is just as heinous