Pension and dividends

[Clare@InTouch]

Hmm Isn't an IFA there to consult on investment decisions, not tax. I thought tax was what paid accountants were all about.

I asked my accountant about tax on pension contributions recently and the immediate response was to speak to my pension provider. I thought that was a bit slopey shoulders but perhaps its a grey area to them, or risk of scope creep?

I thought my accountant should be responsible for tax matters on anything inside or leaving my LTD company bank account, and anything arriving into my own possession or 'on its way into my pension'. i.e. stuff that affects my company tax return or personal tax return - which after all is what I pay them for.

I've never asked an accountant for advice on investments inside pensions and have always made this demarcation clear.

Agreed - but the OP is talking about what makes up net relevant earnings and what he has to earn in order to pay into a pension - that's IFA area.

Tax implications, as Martin and I both explained above re basic rate band, are the accountant side of things.

[Scrag Meister]

Whhhhhaaaattt!!!! Explain more plox...

MyCo pay £1500pm into my pension and paid a top up pre-tax year end, into my pension from my company to bring it up to the old £50k limit, could this have been done more efficiently?

Doh!!!!

[Craig at Nixon Williams]

Whhhhhaaaattt!!!! Explain more plox...

If you have a £10k salary and dividends up to or exceeding the HR threshold then the annual saving would be £250...don't know whether you'd call that massive or not.

The saving is obtained because you would save 22.5% on dividend tax, opposed to 20% on Corporation Tax.

I think (hope!) it's marginal - and lots more hassle!

Examples would be good - I pay salary of 10K, divvies up to Higher threshold and company pays pension of £750 pcm.

As above, you could be £250 pa better off. I would suggest that it's no more hassle, you just need to put the penison payments on your tax return...or get your accountant to do it.

I'll do an example in one of those online spreadsheets and post it shortly, seeing the figures will hopefully make more sense.

Agreed - but the OP is talking about what makes up net relevant earnings and what he has to earn in order to pay into a pension - that's IFA area.

Tax implications, as Craig and I both explained above re basic rate band, are the accountant side of things.

FTFY

[Clare@InTouch]

FTFY

Ooops sorry!

[Craig at Nixon Williams]

Link to figures as promised: https://docs.google.com/spreadsheets...it?usp=sharing

This assumes that you are a higher rate tax payer, but if you take dividends right up to the threshold then the saving is identical. As I mentioned before, the saving arises because of the 2.5% difference between tax on dividends and corporation tax.

Mudskipper - you would save £225 per annum by making personal contributions of £600 per month instead of company contributions of £750 per month. In each case you would end up with £9k in your pension fund as the pension provider would claim basic rate tax relief on personal contributions, but an extra £225 in your pocket.

[ASB]

If you pay into a pension personally then your higher rate threshold will increase by the gross pension amount (upto a maximum of your salary). Say you have a salary of £10,000 this year and pay in £8,000 (net) to a pension (which will be a gross payment of £10,000) then your higher rate threshold will be increased to £51,865 and you will save some tax on your dividends.

NLUK, it is more tax efficient to pay into a pension personally than to do it through the company

Hope this helps!
Craig

craig. Your final para needs a bit of qualification. In the circs for the op that is probably the case. Though numbers would need to be crunched.

however it is unlikely to be the case where most income has sufferered ni. Eg inside ir35 or brolly.

[Craig at Nixon Williams]

craig. Your final para needs a bit of qualification. In the circs for the op that is probably the case. Though numbers would need to be crunched.

however it is unlikely to be the case where most income has sufferered ni. Eg inside ir35 or brolly.

ASB makes a very good point here - if you are caught by IR35 then it is more tax efficient to make employer contributions. In this situations the employer pension payment would be deducted in calculating the deemed salary, so you would be saving tax (probably at higher rate) plus employees and employers NI - there would be no CT saving to be made as the profit made by the company would be identical.

I should also add that tax relief on personal contributions is only available on payments up to your earned income (salary in most cases) therefore if you want to make payments in excess of this then then excess should be employer contributions made from the company so that you still save the CT.

[unixman]

If you pay into a pension personally then your higher rate threshold will increase by the gross pension amount (upto a maximum of your salary). Say you have a salary of £10,000 this year and pay in £8,000 (net) to a pension (which will be a gross payment of £10,000) then your higher rate threshold will be increased to £51,865 and you will save some tax on your dividends.

Okay I am starting to understand.

Craig, you are saying that salary income, even when you have paid no income tax on it, can result in a smaller personal tax bill if you pay it into a personal pension, because it will increase the HR boundary for tax on dividends. Therefore a person in those circumstances will pay less HR dividend tax. Can that really be true ?

I always knew it worked for recovering tax paid on salary, but not tax paid in dividends.

[Craig at Nixon Williams]

Okay I am starting to understand.

Craig, you are saying that salary income, even when you have paid no income tax on it, can result in a smaller personal tax bill if you pay it into a personal pension, because it will increase the HR boundary for tax on dividends. Therefore a person in those circumstances will pay less HR dividend tax. Can that really be true ?

I always knew it worked for recovering tax paid on salary, but not tax paid in dividends.

Yes that is correct - it works by increasing the HR threshold.

You should definitely speak to your accountant first as they will be aware of your specific circumstances.

[mudskipper]

Link to figures as promised: https://docs.google.com/spreadsheets...it?usp=sharing

This assumes that you are a higher rate tax payer, but if you take dividends right up to the threshold then the saving is identical. As I mentioned before, the saving arises because of the 2.5% difference between tax on dividends and corporation tax.

Mudskipper - you would save £225 per annum by making personal contributions of £600 per month instead of company contributions of £750 per month. In each case you would end up with £9k in your pension fund as the pension provider would claim basic rate tax relief on personal contributions, but an extra £225 in your pocket.

Thanks - and I can also then increase the divvies I take to cover what I'm paying in pension without incurring additional tax, because the threshold moves to accommodate my payments?