Director's pension, salary and dividend

[kodo]

Hi all

I'm an IT contractor running as a LTD company. As I've been lucky this year with a solid 12 months work (and no holidays!) I'll hit the financial year end with a large profit (Yay!) and, hence, corporation tax bill. (Boo!)

I have been paying myself a small monthly salary (£640) and can easily pay myself a dividend (circa 30k) as recommended by an online dividend calculator from profits. But I estimate a profit of around 81-83K which, of course, means CT on a whopping wedge of money.

The question is - can I reduce my profit (and hence CT) simply by paying in to directors pension for myself as well as taking the salary and the 30k dividend from what is left over? If so, what is a reasonable amount? I was thinking of 20/30k-ish and which would leave me CT on 60/50K which would still leave enough left over for my 30K dividend.

My understanding is I can pay whatever I want in to a directors pension and it constitutes a cost to the business and hence comes off the profit but I want to check this is ok and I certainly don't want to incur the wrath of HMRC.

Theoretically speaking, could I work back from the 30k dividend to calculate the minimum profit I need to make to pay me this sum and then take the difference and put it into the pension? It seems (at least to a naive code monkey like me) that one would never have to pay tax on more than on around 40K just by increasing your directors pension.

Thanks in advance.

[northernladuk]

Don't get too giddy and leave the warchest lacking.

[aoxomoxoa]

I think the annual limit for your Ltd Co contributions to your pension is £50k, and you need to make the payment before the end of the company's financial year - my understanding is it can't be back-dated.

[jmo21]

Don't get too giddy and leave the warchest lacking.

are you feeling ok???? worried about you man!

[northernladuk]

are you feeling ok???? worried about you man!

Nah, just smelling a newbie who is letting his tax affairs run his life so putting a word of caution out.

Putting money in to a pension is not a bad idea (assuming the pension won' bomb of course) but he needs at least a good year cash in the bank as a war chest first and have enough that he can divi himself out for the full 30K at the beginning of the year which he can they use more efficiently than it sitting in this company. When he has done that then he can start thinking about putting lots in a pension. I would start a pension and start putting a much smaller regular sum in while he working towards getting the rest straight. No good in a pension that he can't touch instead of having it available should he need a large cash injection as well.

Pension is a good idea, just needs to make sure it's the right thing as the money can't be touched again for a very long time.

[kodo]

Director's pension, salary and dividend

Hi all..


This is my second year (and 1/4) - so, yup, still a newbie.... - I have a good reserve for the rainy days from my first year in the company as well as plenty of personal savings. The "theoretically" part of the question was just that - I don't intend to put it all into a pension. I just wanted to make sure that salary, dividend and directors pension isn't going to put me on the wrong side of HMRC.....

Thanks....

[Jessica@WhiteFieldTax]

Hi all..


This is my second year (and 1/4) - so, yup, still a newbie.... - I have a good reserve for the rainy days from my first year in the company as well as plenty of personal savings. The "theoretically" part of the question was just that - I don't intend to put it all into a pension. I just wanted to make sure that salary, dividend and directors pension isn't going to put me on the wrong side of HMRC.....

Thanks....

In theory you will be fine, so long as you obey the £50k cap. "in theory" as there is a reasonableness test on pension contributions, but in practice its not likely to be taken up in a one person company. Start paying a £50k contribution for your kids, and that may change... (yep, seen it)

[Contreras]

If you already had a pension in place then you can carry forward any unused allowance from the previous two years, i.e. up to max £150k. I believe the annual allowance will be reducing to £40k in 2014/15. There's also a lifetime allowance to watch out for.

Definitely get a qualified (and impartial) opinion on the tax aspects if you intend knocking at the high end of those figures though.

[Martin at NixonWilliams]

My understanding is I can pay whatever I want in to a directors pension and it constitutes a cost to the business and hence comes off the profit but I want to check this is ok and I certainly don't want to incur the wrath of HMRC.

The overall remuneration (salary, pension, other benefits etc.) should be reasonable from a commercial point of view. I assume you are the sole fee earner in the company and so this should not be a problem for you providing the profit is there.

A few other points to note:

The £50k annual limit is soon to be £40k, with effect from April 2014. It is possible to use your 50k allowance for the previous three years aswell but only if the scheme was in place during those years.

It sounds as though you are approaching your yearend - Make sure the contribution is made before the period end. It will not be possible to obtain tax relief on the contribution if this is not the case.

In terms of working out the effect on your profit - The cost to the business will be 80% of the contribution value. For example, a £10k contribution will cost the company £8k as £2k of CT is saved.

If you have funds available personally you could consider personal contributions. This will not effect the CT or the company at all, but it would reduce any higher rate tax that is payable on your dividends. Note that the relief on personal contributions is limited to the value of your non-savings income during the year. I would therefore advise that you do not make personal contributions in excess of the £7,696 salary you currently receive.

I hope this helps.

Martin

[DirtyDog]

I have been paying myself a small monthly salary (£640) and can easily pay myself a dividend (circa 30k)

If you have funds available personally you could consider personal contributions. This will not effect the CT or the company at all, but it would reduce any higher rate tax that is payable on your dividends.

Assuming no other income, my maths says that there won't be a higher tax rate liability to pay.