Pension and dividends

[Craig at Nixon Williams]

Hi, if someone at Nixon Williams is still reading, can I ask the same question again, but with regard to charity donations, rather than pensions.

If I make a charity donation, can I still gift aid it, even though as a low salary/high divident contractor, I pay no basic rate income tax ?

Yes you can, the tax credit on the dividends is tax that is deemed to have been paid (despite the fact that there is no cash transaction for any party). If you are giving large amounts then you need to be careful that the tax credit on the dividend is enough to cover the gift aid as the gift aid is at a higher rate than the dividend tax credit.

The gross gift aid donation will increase your higher rate threshold, so like pensions you will be able to take some extra dividends without incurring additional tax.

[lukemg]

Good post, just a couple of things you might want to think about.

1. A Sipp with H/L will incur charges of 0.45%p.a. which makes the trackers more expensive.
2. A tracker is not necessarily the best investment. If a share rises, the tracker has to buy more of that share and if a share falls, the tracker has to sell part of its holding.

1 - true, but for small amounts this is still a good choice, you can probably get this cheaper on other platforms but remember this is advice for people just getting started - KISS.
2. I agree with this one, an equal weighted fund would be better in my opinion because you don't load up on companies whose share prices are riding high. BUT - these are not available here from what I can see, US punters seem to have these in ETF form etc.
Still a good option for beginners tho.

[lukemg]

One reason would be that you care about the investment return because you are directly affected whereas a fund manager only cares about the kickbacks they get from the firms they invest in.

Boo

This is wrong and potentially disasterous advice for a first-time investor getting started. Without a clue, this is no better than sticking it on a horse picked at random.

[lukemg]

Indeed. Also, the key is to find well run companies with good track records and future profit potential, that are well priced, i.e. invest in value. I think early on though trackers are useful whilst you build up your assets.

Yes - the key is this but why do you think you can do this consistently against all the other people constantly analysing the market for shares in this position. You can't and don't presume you can if you get lucky on a couple of picks.
Agree about the trackers tho and if you have to placate your gambling streak, by all means use 10% of your portfolio for individual shares BUT make sure you compare against investing in FTSE all-share on same date and time - this link will help.
Chart Tool | FE Trustnet

I have got individual shares, funds, trackers, etf's, the lot and when I backtest against if I had just bought a tracker on the same date, some are ahead, some are behind and overall I am just about level with the market so ALL the extra effort has been wasted.
BUT - I really enjoy the process and following shares, getting dividends in etc so it is worth it to me but not worth it for return purposes.

[unixman]

Thanks to captainham and Craig at NW. I think we are saying that

(a) you can put dividend income towards a charity (whereas you can't put it into a pension)

(b) you can gift aid the donation, enabling the charity to reclaim tax. The tax they reclaim comes out of what you paid in dividends, so either make sure your dividend tax covers it or expect a deficit in your next tax return.

(c) Tax on dividends being 10% notional in the BR band and 25% effective above that. Eg. If you paid full dividend in the BR band that gives you about 2k of tax to go at. If your dividends crossed into the HR band, there will be more.

(d) Coupling this example with the earlier pension discussion, you could put your (low) salary into your pension and make gift-aided donations over and above that.

[Craig at Nixon Williams]

Coupling this example with the earlier pension discussion, you could put your (low) salary into your pension and make gift-aided donations over and above that.

This is correct, and by doing so the point that you begin paying higher rate tax on your dividends will be increased by 125% of the total amount contributed to your pension and to charity.

[Wmnr]

Good post, just a couple of things you might want to think about.

1. A Sipp with H/L will incur charges of 0.45%p.a. which makes the trackers more expensive.
2. A tracker is not necessarily the best investment. If a share rises, the tracker has to buy more of that share and if a share falls, the tracker has to sell part of its holding.

Heres a comparison of SIPP providers and their charges
DIY pensions: The cheapest Sipp fund supermarkets - Telegraph

I beg to differ with point 2. FTSE trackers are typically weighted by market capitalisation (which is shareprice * number of shares), so as a share price rises, its percentage of the tracker goes up automatically. The tracker does not buy more shares as the price goes up, but it will buy and sell shares as new companies come into the index or drop out of it

[Retro]

Heres a comparison of SIPP providers and their charges
DIY pensions: The cheapest Sipp fund supermarkets - Telegraph

I beg to differ with point 2. FTSE trackers are typically weighted by market capitalisation (which is shareprice * number of shares), so as a share price rises, its percentage of the tracker goes up automatically. The tracker does not buy more shares as the price goes up, but it will buy and sell shares as new companies come into the index or drop out of it

Sorry, you are absolutely correct, the necessity for a tracker fund to buy or sell shares relates only to those companies that are entering or leaving the index.

[lukemg]

This is mostly true except for re-investment of dividends and new contributions to the fund.

[unixman]

...
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.

'Afternoon! Sorry to resurrect this thread so late. I have just re-read the whole thing and it is all good stuff. I just wanted to check re the limits above. I understand they apply to pension contributions made personally, from personal salary. But what limits apply to contributions made by your Ltd company into your personal pension ?