Pension - Employer Contribution

[Martin at NixonWilliams]

I'm not sure that is correct.

For a high rate tax payer the difference in 20% CT vs 22.5% high rate dividend tax makes it marginally more efficient to pay into a pension personally rather than make company contributions. Personal contributions are limited to 100% salary though, so for example with £10k salary the max. personal contribution is £8k (the pension receives £10k after relief). Above this the only option is company contributions (up to £40k annual limit).

For basic rate tax payer, either option works out the same (20% corp tax vs. 20% personal tax). In this case it may be better to make company contributions which a) are not capped at 100% salary and b) count as allowable expense before any IR35 calculation.

IANAA (or an IFA).

I agree with Contreras re higher rate taxpayers.

For basic rate taxpayers, there can be a small additional benefit for contributing personally if income is taken up to the higher rate threshold, as you can create additional basic rate allowance from which further dividends can be taken without paying additional tax.

For example - If you wanted to make a £5k gross contribution you would need to pay £4k. If you took the £4k from the company account as a dividend the gross dividend would be £4,444 and your basic rate band would be extended by £5k due to the contribution. You have effectively created and additional £500 (£556 gross) that can be taken from the company account tax free aswell as what was needed to make the pension contibution.

[Contreras]

Your overall income position needs to be established and that's why its best to discuss these options with your IFA (rather than with an accountant) but generally speaking a higher rate taxpayer is better off with option 1. With Option 2, typically with contractors operating through their own company, there will be a mixture of salary and dividends (and other income) to consider and there is a restriction on the contribution you can make personally into a personal scheme (normally no more than your gross salary in the tax year in question - and if your salary is say £8k, then there is more scope for contributions with Option 1).

I'm not sure that is correct.

For a high rate tax payer the difference in 20% CT vs 22.5% high rate dividend tax makes it marginally more efficient to pay into a pension personally rather than make company contributions. Personal contributions are limited to 100% salary though, so for example with £10k salary the max. personal contribution is £8k (the pension receives £10k after relief). Above this the only option is company contributions (up to £40k annual limit).

For basic rate tax payer, either option works out the same (20% corp tax vs. 20% personal tax). In this case it may be better to make company contributions which a) are not capped at 100% salary and b) count as allowable expense before any IR35 calculation.

IANAA (or an IFA).

[JoJoGabor]

I went through these options with my accountant and they work out to be almost exactly the same. I went for the employer contribution only as I dont have to wait up to 19 months for my tax relief to be claimed via self assessment

[Forbes Young]

Thanks Forbes Young for the information.

There appears to be two ways to make pension contribution.

(1) The way you mentioned above. Make all contribution as employer contribution, which appears can be treated as company expense, therefore tax deductable.
(2) Draw salary, contribute to pension personally, and claim tax relief. It looks like basic 20% tax is automatically added, and for higher rate tax payer, another 20% can be claimed during self assessment.

Is option (1), better because there is no hassle of claiming relief? Is there any other advantage or drawback of choosing option 1?

Your overall income position needs to be established and that's why its best to discuss these options with your IFA (rather than with an accountant) but generally speaking a higher rate taxpayer is better off with option 1. With Option 2, typically with contractors operating through their own company, there will be a mixture of salary and dividends (and other income) to consider and there is a restriction on the contribution you can make personally into a personal scheme (normally no more than your gross salary in the tax year in question - and if your salary is say £8k, then there is more scope for contributions with Option 1).

[ASB]

Depending on salary level employer contributions can be better because if personal contributions were made these would also have suffered ni. Tax is reclaimed. Ni isnt.

[Ashwin2007]

If you are a contractor operating through your own ltd company you can set up a pension scheme so that your company pays the contribution into (eg) a stakeholder scheme for yourself (as a tax allowable cost). You dont need to make separate employees and employer contributions. Ask your IFA and they will be able to come up with options for you as well as tell you the maximum you can contribute each tax year etc

Thanks Forbes Young for the information.

There appears to be two ways to make pension contribution.

(1) The way you mentioned above. Make all contribution as employer contribution, which appears can be treated as company expense, therefore tax deductable.
(2) Draw salary, contribute to pension personally, and claim tax relief. It looks like basic 20% tax is automatically added, and for higher rate tax payer, another 20% can be claimed during self assessment.

Is option (1), better because there is no hassle of claiming relief? Is there any other advantage or drawback of choosing option 1?

[Forbes Young]

For setting up Employer contribution into the pension for an employee, is it must that the employee contribution also to be set up? Can there be only employer contribution without employee contribution?

If you are a contractor operating through your own ltd company you can set up a pension scheme so that your company pays the contribution into (eg) a stakeholder scheme for yourself (as a tax allowable cost). You dont need to make separate employees and employer contributions. Ask your IFA and they will be able to come up with options for you as well as tell you the maximum you can contribute each tax year etc

[Ashwin2007]

Thanks JMO21.

[jmo21]

For setting up Employer contribution into the pension for an employee, is it must that the employee contribution also to be set up? Can there be only employer contribution without employee contribution?

No.

Yes.

[Ashwin2007]

For setting up Employer contribution into the pension for an employee, is it must that the employee contribution also to be set up? Can there be only employer contribution without employee contribution?