Pension and dividends

[Craig at Nixon Williams]

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?

Yes - if you pay £7,200 per annum (£9,000 in the pension pot after BR tax relief) then the higher rate band will be increased by £9,000 which will give you a net dividend of £8,100 which will more than cover the pension payment.

If you are already making company contributions then you will need to speak to the pension provider to change the type of payment that you are making so that they know to claim BR tax relief.

[unixman]

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.

Thank you. In 2 posts you have made the position clearer than my accountant could (or would) in 3 weeks of phone calls and emails. I lost out by not paying in before April 6th. C'est la vie.

[Craig at Nixon Williams]

Thank you. In 2 posts you have made the position clearer than my accountant could (or would) in 3 weeks of phone calls and emails. I lost out by not paying in before April 6th. C'est la vie.

You may still be able to make pension contributions through the company to get money into the pension pot, and you would save Corporation Tax on it. This would depend on what you have already contributed, when your company financial year runs and how much you want to add to the pension pot.

[unixman]

Hi Craig's your reply to mudskipper:

Yes - if you pay £7,200 per annum (£9,000 in the pension pot after BR tax relief) then the higher rate band will be increased by £9,000 which will give you a net dividend of £8,100 which will more than cover the pension payment.

You are saying you can pay yourself an extra 7200 in dividends, which will move your HR threshold upwards by 9000. 7200 is what you would be left with after 9000 was taxed at 20%. Where does the 20% figure come from ? Is it to "refund" the 20% corporation tax already paid on the dividends in the basic rate band ?

[Craig at Nixon Williams]

Hi Craig's your reply to mudskipper:



You are saying you can pay yourself an extra 7200 in dividends, which will move your HR threshold upwards by 9000. 7200 is what you would be left with after 9000 was taxed at 20%. Where does the 20% figure come from ? Is it to "refund" the 20% corporation tax already paid on the dividends in the basic rate band ?

The pension provider would claim 20% basic rate tax which would be added to the pension pot. It doesn't matter that you won't have suffered tax on the income at this level. If it is an employer contribution and you have saved CT as a result, the pension provider won't claim back anything as it will be a gross contribution.

[ASB]

Whilst it might be slightly tedious it is easy enough to bung the numbers onto you SA account and do a calculation. Just don't submit it the IR then it's pretty straightforward to work out how it will impact your own circumstances and make appropriate decisions.

For thos who take no salary (e.g. spouses potentially) then there is always the 3600 de miniimus limit so there are circumstance where it is possible to get full relief on tax that hasn't even been paid at all.

[unixman]

The pension provider would claim 20% basic rate tax which would be added to the pension pot. It doesn't matter that you won't have suffered tax on the income at this level. If it is an employer contribution and you have saved CT as a result, the pension provider won't claim back anything as it will be a gross contribution.

The pension provider would be assuming you are a BR tax payer and would be reclaiming BR tax on your behalf. This is not correct. Contractors in the low salary/high dividends model pay no basic rate tax. They are not BR tax payers.

[Craig at Nixon Williams]

The pension provider would be assuming you are a BR tax payer and would be reclaiming BR tax on your behalf. This is not correct. Contractors in the low salary/high dividends model pay no basic rate tax. They are not BR tax payers.

Don’t think of it reclaiming tax that you have paid - think of it as a tax credit that the pension provider claims from HMRC, that the government are essentially topping up the pension fund for you. It’s entirely legal to do this even if you haven’t actually paid tax on your earned income.

[unixman]

True you can reclaim tax that was never actually paid, but only up to the limit of £3600 gross.

HM Revenue & Customs: Tax relief on pension contributions

[Craig at Nixon Williams]

True you can reclaim tax that was never actually paid, but only up to the limit of £3600 gross.

HM Revenue & Customs: Tax relief on pension contributions

The £3,600 is if you don't have any earnings, not if you haven't paid tax so the title in that is slightly misleading in my opinion.

There are 3 limits for what can be paid into your pension fund personally (all expressed as gross amounts):

• £3,600 - if you have no earned income
• 100% of your earned income
• £40,000 - if your earned income exceeds £40,000 (this one applies to total payments into the fund, made up of both personal and employers contributions

As mentioned previously, don't think of it as reclaiming tax that you have paid, but that the government are topping up your pension fund.