Ltd co Pension - worthwhile?

[qwertybert]

I'm thinking of contracting but still have some doubts in a few areas. Forgive the questions - I have searched but cannot find exactly what I'm after so wondered if anyone could help:-

Firstly - I'm looking at setting up as a Ltd co as opposed to Umbrella and I'm a little confused around the benefits (or otherwise) of paying into a company pension. I understand that this is a very personal decision based on individual pref's and circ's and I understand that a Ltd Co.paying into your pension pot is more tax efficient than Dividends. However, I've read that it can bring down your Corp Tax liability down also - is this correct? In reality, how many contractors are paying into such pensions rather than plowing dividend income into other investments such as property?

Secondly, I'm a little unsure of how contractors make best use of profits over and above the £9k salary and £32k tax threshold's. Is it the norm just to bite the bullet and pay the 32.5% rate on any earnings over that?

Sorry again for questions that I'm sure have been asked but any advice on these gratefully received.

[Clare@InTouch]

A pension contribution from a limited company into a personal pension is an allowable expense for CT purposes, so it will reduce your company tax by 20% of the value of the contribution. There are certain limitations on this though, so talk to an IFA before you do anything (unless you're happy you know enough). They could also suggest certain life policies that could be paid through the company with no benefit in kind.

How tax efficient you are depends on how you take your cash. In an ideal world you would take a small salary and then dividends up to higher rates, anything else would be retained in the company. After 5 years you have a pot of (say) £150,000 and you go through a formal liquidation to withdraw the whole lot as capital, paying just 10% tax after Entrepreneur's Relief (or less after your annual exemption is taken into account too) - this is better than the effective 25% tax you would have paid on a higher rate dividend if you'd taken it out along the way (25% of the net dividend is the same as 22.5% of the gross, which is the 32.5% less a 10% tax credit).

You can be even more tax efficient if you're married and your spouse takes half the basic rate dividends along the way, assuming they have no other income.

There's a lot of assumptions there and it's not flat advice that suits all because you need to consider the income & tax position as a whole. But it's an idea of how it could work in an ideal situation.

[Waldorf]

I would avoid pension contributions of whatever sort (unless your employer provides them free!) - despite the tax relief they are too restrictive and I get a much better deal from my ISA, I invest my full ISA allowance each year and would like this to be increased.

I expect to be a 40% tax payer in my retirement and as such the tax exempt income from my ISA will be helpful.

[Maslins]

Each to their own...but following your OP, there will be quite a few Ltd Co contractors who take their £9k salary & £32k divis (your figures, IMO you'd probably want slightly lower to sit under NIC and higher rate thresholds...guessing you're basing it on personal allowance and forgetting divi tax credit?) and put any excess earnings into a pension scheme as an employer contribution.

Pension contributions, like salary, reduce the company's profit and hence corporation tax. Dividends don't, they're a distribution of post corporation tax profits.

Main downside of pensions is that you typically can't get your hands on the cash for quite a while. As Waldorf suggests, ISAs give you the flexibility that you can spend them if a rainy day comes...but you don't get the tax break when putting the cash in.

Pensions have also received a bad name in the press...but that tends to be more the investments which just happen to be within pension schemes rather than the "wrapper" that is a pension.