Company SIPP contribution - effective tax savings?

[ASB]

Other points to note:
- Personal contributions can be slightly more tax efficient than company contributions, but the saving is only usually worthwhile if you are paying a salary.

I suspect the real issue would be NI contributions. I guess it depends on whether one is viewing tax efficiency as what is handed over to the exchequer or just pure tax. [i.e. paying extra salary to enlarge pension contributions would generally be pointless and counter production because of the NI cost]

I recall if one has salary below the LEL it was slightly more efficient to pay personal contributions based on that income level and then make corporate contributions as well. Even so ones overall position in terms of income does impact the effect of reliefs and it is needed to do the sums both ways.

[acferrad]

SIPP tax savings rate

I'm not sure about some of your calculations, or that you're being as tax efficient as possible.

£100,000 net, does that include any wages?

How do you get £32,000 tax free dividends? Or the tax on the overall £80,000 in dividends.

Say you have a normal tax allowance, then you can earn £41,450 before higher rates. If you're taking a salary of £7,692 then you have £33,758 left of your basic rate band. That's gross dividends though, so you need to divide by 10 and multiply by 9 to get the net. So that becomes £30,382.

Total net dividends of £80,000 therefore leaves £49,618 in higher rates. That would give a tax liability of 25% of the net (which equates to 22.5% of the gross) = £12,405.

CT of 20% plus the higher rate dividend tax = £32,405.

If you had instead moved £10,000 into a SIPP then you would save 20% CT on that, so £2,000, and 25% higher dividend tax, so £2,500. Saving £4,500 in overall tax. But that's only if the option would be to pay into a SIPP or take the dividend and spend it on chocolate. If you take the dividend but pay into the SIPP personally then your basic rate tax band increases, so there's tax relief personally that way, so not quite the £4,500 gain. It can get quite complex.

You could of course save more tax by simply not emptying the company entirely each year, and saving the funds with a view to closing down in a few years time via a liquidation. The tax on a final distribution would then be under 10% (Entrepreneur's Relief plus annual CGT exemption) which is 15% better than the higher rate dividend would be.

Thanks for the reply. I'm not sure of the calculations either (I am not an accountant)- however the example calculations I gave were just really to try to determine the marginal tax savings rate I would get if the company makes a a contribution into my SIPP. This is the number I am trying to find.

So let's say I am taking the £7,692 salary, and the rest as dividends as you show above. My understanding is that I personally cannot contribute more than 100% of my salary (£7,692) into my SIPP- that's why I thought I had to do it through the company. If that's not correct let me know.

So I pay £32,405 total tax. So are saying that I would only pay £32,405 - £4,500 = £27,905 total tax if the company makes a £10,000 SIPP contribution? If so, that represents a 45% tax savings, which looks like a good deal to me for a tax-defered savings (I am already contributing to an ISA).