Pension and dividends

[unixman]

Been researching this question for a few weeks. The answer still isn't clear, my accountant doesn't know or is unwilling to say, Google is getting sick of me asking and a search in this forum only hints at the truth.

Like most of you, I run a Ltd company and pay myself a low salary of about 10k plus large dividends. My dividends exceed the HR threshold , so I pay higher rate tax of effectively 25% on the portion of dividend cash exceeding the threshold. Nothing too shocking there.

I have an existing personal pension that I would like to pay into and reclaim tax, hopefully that 25% I paid on some dividends. However:

- My low salary was not actually taxed. Nothing to reclaim there.

- Dividend income is not deemed a "qualifying income" for pensions. Not only can I not reclaim the tax, I cannot legally put ANY of the divi cash into the pension . My accountant confirms this, and has also said the complete opposite. The links below seem to confirm it, slightly.

Is this right ? The following link is close but not quite relevant. NB I am aware of pension payments directly from the company and will probably switch to that mechanism eventually, but I would like to understand this little chestnut first. Also, before the forum heavyweights give me brusque advice to change my accountant, yes that also is on my bucket list.

Contractoruk answers a slighyl different question:
http://forums.contractoruk.com/accou...ividend-3.html

Google says no, yes, kinda:
http://www.taxation.co.uk/taxation/A...ension-problem

Google says no: (5th paragraph 2st sentence "Dividend income cannot support pension payments."):
Dividends versus Salary

[Clare@InTouch]

Your accountant may well be avoiding the question because it's straying a bit too far into IFA territory. Do you have an IFA you could ask instead?

Paying into a pension will certainly increase your basic rate tax band, meaning less dividends would be subject to higher rate tax in the first place.

[northernladuk]

If paying pension straight from the company is much more efficient why not go straight for that and forget this issue?

[unixman]

Paying into a pension will certainly increase your basic rate tax band, meaning less dividends would be subject to higher rate tax in the first place.

Hi Clare you are saying that the band adjustment arising from my paying pure salary into the pension (up to 10k) will work to avoid the dividend tax. That was my intention but those links seem to say not.

northernladuk - good point but I would like to understand how this bit too.

Hi Martin at NixonWilliams have you a view ?

[Clare@InTouch]

I think you may be mixing two different concepts.

One is how much you can put into your pension, given your earnings and how those earnings are made up.

The other is the one I mentioned, in that your tax bands will increase if you make personal pension contributions.

Talk to an IFA about the rest though!

[Craig at Nixon Williams]

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

[northernladuk]

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

Whhhhhaaaattt!!!! Explain more plox...

[mudskipper]

Whhhhhaaaattt!!!! Explain more plox...

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.

[Contreras]

Been researching this question for a few weeks. The answer still isn't clear, my accountant doesn't know or is unwilling to say, Google is getting sick of me asking and a search in this forum only hints at the truth.

Like most of you, I run a Ltd company and pay myself a low salary of about 10k plus large dividends. My dividends exceed the HR threshold , so I pay higher rate tax of effectively 25% on the portion of dividend cash exceeding the threshold. Nothing too shocking there.

I have an existing personal pension that I would like to pay into and reclaim tax, hopefully that 25% I paid on some dividends. However:

- My low salary was not actually taxed. Nothing to reclaim there.

- Dividend income is not deemed a "qualifying income" for pensions. Not only can I not reclaim the tax, I cannot legally put ANY of the divi cash into the pension . My accountant confirms this, and has also said the complete opposite. The links below seem to confirm it, slightly.

Is this right ? The following link is close but not quite relevant. NB I am aware of pension payments directly from the company and will probably switch to that mechanism eventually, but I would like to understand this little chestnut first. Also, before the forum heavyweights give me brusque advice to change my accountant, yes that also is on my bucket list.

Contractoruk answers a slighyl different question:
http://forums.contractoruk.com/accou...ividend-3.html

Google says no, yes, kinda:
http://www.taxation.co.uk/taxation/A...ension-problem

Google says no: (5th paragraph 2st sentence "Dividend income cannot support pension payments."):
Dividends versus Salary

Dividend income is not earned income so doesn't count.

I think the answer you're looking for is to NOT pay dividends above the HR threshold and to make company contributions direct to the pension instead. This way is not limited by salary. The cheque or bank transfer must go direct from YourCo to PensionsCo and they must be told it's an employer contribution being made gross (so you don't end up getting double tax relief on it).

You can, if you wish, in addition make personal contributions up to 100% of salary. Max total contribution is limited to £40k pa. but you can carry back unused allowance from previous years subject to certain conditions.

[CheeseSlice]

Your accountant may well be avoiding the question because it's straying a bit too far into IFA territory. Do you have an IFA you could ask instead?

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.