Reply to: Personal pension contributions

[northernladuk]

Yes. Perfect.
It says to me, what others have said, that if you do a short term IR35 gig don't sweat it just pay more into pension (assuming warchest is suitable for that).

I think there are also the added benefits around being taking more out of your LTD in a more efficient manner that you'd get taxed on at the end otherwise. Granted it won't seem like a saving at the time but come the day you close the limited you'll be taxed on less. Maybe not enough to consider as a decision point but every penny counts I guess.

[Lance]

Does that answer it any better?

Yes. Perfect.
It says to me, what others have said, that if you do a short term IR35 gig don't sweat it just pay more into pension (assuming warchest is suitable for that).

[doconline]

Thanks.

My question is clearly not articulated very well.
I'll try again...

It's a hypothetical scenario related to the OPs question.
- An inside IR35 contract for a few months (enough to get around £40k after tax). No company pension all PAYE done and dusted.
- Assume that the rest of the year is outside IR35 gigs, taking dividends, and going over the higher rate tax threshold.
- Pay £40k from personal contributions (no company contributions) into a SIPP

Which is the larger sum. The amount of cash the government add to your SIPP, or the amount of tax paid for the inside IR35 gig? I think it's the extra contribution but I don't understand it well enough to work it out.

OK, using figures from listentotaxman, you would need to earn £55K, to get £40K (based on it being your only PAYE income), these are just PAYE figures, so don't take into account the usual Umbrella costs etc. But that should keep things simple. This gets you a figure of £3350 per month take home and you are paying £879 in tax per month (after your tax allowance of £11850).

To add £40K to your pension (current standard maximum per year, not using any other years allowances etc) you would pay in £32000 and then get £8000 back in tax relief, i.e. contribution from the government. So out of your take home pay of £40200, you would actually spend £32000, with £8000 coming back in tax relief (from the £10550 you've paid in tax). You can also get further tax relief of about £1730 (via your tax return) as you will be a higher rate tax payer.

However, what I think you might be talking about is if you earned £42,500 before tax, after tax and NI is taken off (£6K, £4K), you would be left with just over £32K each year. If you put this all into a SIPP you would then get the £8000 back from the government and effectively put £40K into your pension. However, you would be getting a £8K increase, when you have only paid £6K PAYE, so this would just come from the exchequer and you would be one of the lucky ones who is getting more out than you pay in PAYE, but you would still be paying £4k in NI, so the government would be getting £2k overall.

I think it is such an edge case that it wouldn't come up or cause any issues.

Does that answer it any better?

[northernladuk]

Thanks.

My question is clearly not articulated very well.
I'll try again...

It's a hypothetical scenario related to the OPs question.
- An inside IR35 contract for a few months (enough to get around £40k after tax). No company pension all PAYE done and dusted.
- Assume that the rest of the year is outside IR35 gigs, taking dividends, and going over the higher rate tax threshold.
- Pay £40k from personal contributions (no company contributions) into a SIPP

Which is the larger sum. The amount of cash the government add to your SIPP, or the amount of tax paid for the inside IR35 gig? I think it's the extra contribution but I don't understand it well enough to work it out.

Depends.

[Lance]

Are you talking about about a personal contribution, or a company contribution?

Either way the government won't add anything over the the £40K. But if it is paid after tax has been paid (PAYE for example), the government just adds in the tax paid on the £40K.

e.g. For ease (ignoring NI, tax allowance etc) if you only earn £40K that year, you pay 20% tax on it you get £32k in your bank account. If you put it all into your pension, the government add the £8K tax paid back into your pension. This is because you will be taxed on the income from the pension when you begin to draw it (subject to personal tax allowances and an exception for the current initial 25% tax free portion).

if it's coming out of a company account, into your personal SIPP you don't get the extra from the government, but it is paid as a business expense, so you don't pay Corporation Tax on it, so effectively you are getting a 20% bonus.

So the government doesn't ever put in more money than you've earned / paid in tax, and they will get their share eventually anyway.

HTH

Thanks.

My question is clearly not articulated very well.
I'll try again...

It's a hypothetical scenario related to the OPs question.
- An inside IR35 contract for a few months (enough to get around £40k after tax). No company pension all PAYE done and dusted.
- Assume that the rest of the year is outside IR35 gigs, taking dividends, and going over the higher rate tax threshold.
- Pay £40k from personal contributions (no company contributions) into a SIPP

Which is the larger sum. The amount of cash the government add to your SIPP, or the amount of tax paid for the inside IR35 gig? I think it's the extra contribution but I don't understand it well enough to work it out.

[doconline]

cool.

Here's a question though... If you do a 3/4/5 monther, and put a whole £40k in won't the government extra added to the pension be greater than the tax paid for the gig????

Are you talking about about a personal contribution, or a company contribution?

Either way the government won't add anything over the the £40K. But if it is paid after tax has been paid (PAYE for example), the government just adds in the tax paid on the £40K.

e.g. For ease (ignoring NI, tax allowance etc) if you only earn £40K that year, you pay 20% tax on it you get £32k in your bank account. If you put it all into your pension, the government add the £8K tax paid back into your pension. This is because you will be taxed on the income from the pension when you begin to draw it (subject to personal tax allowances and an exception for the current initial 25% tax free portion).

if it's coming out of a company account, into your personal SIPP you don't get the extra from the government, but it is paid as a business expense, so you don't pay Corporation Tax on it, so effectively you are getting a 20% bonus.

So the government doesn't ever put in more money than you've earned / paid in tax, and they will get their share eventually anyway.

HTH

[Lance]

They don't add anything for company contributions.

that's for a personal contribution.
Pay attention at the back.

[barrydidit]

cool.

Here's a question though... If you do a 3/4/5 monther, and put a whole £40k in won't the government extra added to the pension be greater than the tax paid for the gig????

They don't add anything for company contributions.

[northernladuk]

DIF

DILLIGAF

[Lance]

HTH

DIF

[northernladuk]

cool.

Here's a question though... If you do a 3/4/5 monther, and put a whole £40k in won't the government extra added to the pension be greater than the tax paid for the gig????

Dunno.

HTH

[Lance]

If he does through CU he can contribute as much as he wants. All of it if suits him so no tax to pay. A good option for warchest heavy contractors dipping in to an inside gig who can put the entire income in to the scheme.

cool.

Here's a question though... If you do a 3/4/5 monther, and put a whole £40k in won't the government extra added to the pension be greater than the tax paid for the gig????

[northernladuk]

There isn't an advantage to doing it like this though, I don't think.
Might as well just pay from personal cash into a SIP and get 20/40% for free from the government.

If he does through CU he can contribute as much as he wants. All of it if suits him so no tax to pay. A good option for warchest heavy contractors dipping in to an inside gig who can put the entire income in to the scheme.

[Lance]

Can you even do that? The Umbrella has to provide you one by law. You could change Umbrella to Contractor Umbrella who allow any amount of contributions and I believe use Scottish Widows who are pretty OK. Lucy posts a lot on here and might respond but if I were you I'd give CU a bell and chat it over with them.

I'd check your options with your brolly first before running the numbers.

There isn't an advantage to doing it like this though, I don't think.
Might as well just pay from personal cash into a SIP and get 20/40% for free from the government.

[northernladuk]

Hi all.

Can someone please give me some guidance with regards to my options on a pension contribution. I work through an Umbrella Company at the moment (due to IR35) I know now that I currently contribute very little to the company pension but I was to withdraw this and invest in a SIPP with HL. I just want to know the optimal amount to be investing each week for tax efficiency purposes (al also to built a sufficient nest egg for myself). I would hope to pay this from my gross pay in order to reduce my tax bill.

I can give you the run down of my figures if this helps?

Any help would be greatly appreciated.

Can you even do that? The Umbrella has to provide you one by law. You could change Umbrella to Contractor Umbrella who allow any amount of contributions and I believe use Scottish Widows who are pretty OK. Lucy posts a lot on here and might respond but if I were you I'd give CU a bell and chat it over with them.

I'd check your options with your brolly first before running the numbers.