Reply to: Employer's pension contributions

[glashIFA@Paramount]

WHS. QROPS is what you want to look for.

The pension schemes in other countries can offer a great deal more flexibility over when and how benefits are taken but I think that you have to be out of the UK for five full tax years before they are free from HMRC interference.

Yep.

[Gonzo]

Can the UK pension be transferred to some other country if I plan to retire there. Will I have to pay any UK tax on transfer?
Also is there a list of countries where it can be transferred to? Assuming you can transfer it a country where there is no income tax i.e. dubai, isn't it a win win situation
TIA

Yes it can. Google QROPS (Qualifying Recognised Overseas Pension Schemes) and you should find all your answers.

WHS. QROPS is what you want to look for.

The pension schemes in other countries can offer a great deal more flexibility over when and how benefits are taken but I think that you have to be out of the UK for five full tax years before they are free from HMRC interference.

[glashIFA@Paramount]

Can the UK pension be transferred to some other country if I plan to retire there. Will I have to pay any UK tax on transfer?
Also is there a list of countries where it can be transferred to? Assuming you can transfer it a country where there is no income tax i.e. dubai, isn't it a win win situation
TIA

Yes it can. Google QROPS (Qualifying Recognised Overseas Pension Schemes) and you should find all your answers.

[Olly]

The emphasis in those sums on higher rate tax is very misleading, IMO. I suspect that the majority of us will be married or will have partners with whom we split our income payments. Those of us who do this will not pay anywhere near 40% tax unless on a massive hourly/day rate.

my feelings too...as a single chap 3K a month is plenty to get by on
alllllllllsoo...why would those on a massive rate pay 40% why wouldn't they just leave it in Ltd until the jobs dry up or they decide not to work anymore........exactly what I'm doing...take 36Kish per yr until all gone.

only tax is 21% corporation tax

[Fred Bloggs]

The emphasis in those sums on higher rate tax is very misleading, IMO. I suspect that the majority of us will be married or will have partners with whom we split our income payments. Those of us who do this will not pay anywhere near 40% tax unless on a massive hourly/day rate.

[ASB]

Tax Relief - How It Works

For £100 of company gross profit: when you pay dividends, first you pay corporation tax of 21% (£21) leaving a dividend of £79. Then you pay further tax on the dividend of 22.5% (£17.78), leaving you with £61 in your pocket. You've just paid the Revenue £39 for the privilege of having £61 in your hand now.

But if you contribute to your pension: Instead of taking £61 now, the company makes a £100 contribution to your pension. In reality £25 of your contribution represents the part of the pension fund which you can draw tax free when you are retire - it also has the opportunity to grow and be worth considerably more than this initial investment. £36 pounds also go into the pension fund, together with the £39 that would have gone to the taxman (quite a decent return). This £75 can also grow and be used to skim off an income at a later date, or buy an annuity.

John Yerou

John,

Well, ok but.....

Given the assumption that the individual has enough income to be a higher rate taxpayer and they therefore have additional income tax to pay on the dividends.

Yes, the gross 100 quid of company profit gives you 100 quid in the pension fund or 61 quid in your hand. I don't dispute this - or the rest of your example.

But.....

Lets say the individual pays the £61 into their pension fund. This is then immediately grossed up with basic rate relief, this is 25% of the net payment into the pension so the pension gets another £15.25.

Further the individual can still (famous last words get higher rate relief on the contributions (though I know changes are afoot). So on this basis the pension has got £76.25 and the individual still has £15.25.

What the individual should DO in order to be comparing apples with apples is actually make a contribution of £76.25 into the pension. After claiming the higher rate tax relief on this the individual has only used the net 61 they received.

So, in this case from the same 100 quid, then pension fund gets 100 quid on a company contribution or 95 quid and change from a personal contribution. Alternatively the individual has 61 quid in their hand.

So, what is the individual likely to get out of 100 quid in the pension fund.

25 quid tax free, and 75 quid as a (taxable) annuity. I think it is safe to assume that all allowances are used by the basic state pension etc. Thus the overall return from the pension (and we will assume the actuary have done their job exactly right) is:-

75 * .6 + 25 = 70 [If you didn't take the tax free lump sum the the return would be £60 making the individual worse off].

Now, 70 is of course a good bit better than 61 - but most of the tax advantages come from the lump sum. And we all know that is possibly under threat. Abolition of the lump sum would be unhelpful.

Of course if one change from a higher rate taxpayer in work to a standard rate in retirement then one would get a return of 85 from the pension (far better than the 61 otherwise).

So yes, I do agree you get tax relief at source - and that is useful - but you are swapping it for being charged tax at the other end on maturity.

[I have assumed for the point of this that growth rates both inside and outside the pension are the same at nil - it is irrelevant in any event if they grow at the same rate it does not distort the figures]

Don't get me wrong, I'm not against pensions - indeed have a a fair chunk of them. But, the idea of you are miles better off because of tax relief is only really true if you change from higher rate to standard rate. The tax free lump sum does give you the potential to be about 10% better off in retirement - but it is entirely possible that charges erode that to a certain extent (though less likely now, a number of passive pension funds are by far the lowest charging).

For an individual who is a standard rate payer working and retiring then the tax advantages overall are minimal.

[Olly]

Then you pay further tax on the dividend of 22.5% (£17.78), leaving you with £61 in your pocket. You've just paid the Revenue £39 for the privilege of having £61 in your hand now.
why a further 22.5%? It's was my understanding that about 30K in dividends + 6K ish in salary = nothing to HMRC over and above initial 21% CT. Why not just draw low salary and dividend until there is no money left in Ltd? There's no reason to take it all out each yr is there?

it also has the opportunity to grow and be worth considerably more than this initial investment.
errmmmmmmm

skim off an income at a later date, or buy an annuity.
which are both taxed aren't they?

John Yerou

Sorry I'm getting a bit confused, please could you address my points John?
Thanks

[Andy2]

Can the UK pension be transferred to some other country if I plan to retire there. Will I have to pay any UK tax on transfer?
Also is there a list of countries where it can be transferred to? Assuming you can transfer it a country where there is no income tax i.e. dubai, isn't it a win win situation
TIA

[worzelGummidge]

You will have absolutely no problem with that. By the way you can contribute up to your total pre-taxed earings.

OK thanks. That's useful. I think that I may up the contribution if I every get off this bench.

[Freelancer Financials]

I'd take a bit of issue with "pensions are undoubtedly tax efficient". Certainly they appear so on the surface, but if one considers isas etc - at least to the level it is possible to contribute - then these are also tax efficient. In effect with a pension offers tax deferment - because the return is largely taxed at the point of receipt. If effect if you are tax at the same rate in retirement as you are in work then it is broadly neutral. If you were a normal rate taxpayer in work and a higher rate payer in retirement then it could be to your detriment. However, the benefit of age allowances and the 25% tax free sum does tend to put the benefit on pensions. It would be unusual - but possible - for an individual in specific circumstances uses other asset classes to fund retirement options.

The real saving, in my view, with pension contributions comes from NI savings. And that if of particular importance to anybody who is IR35 caught. Of course that requires corporate contributions.

Ultimately a case can be made for using full ISA allowance and pension after. But it all depends upon the individual. Certainly anybody intending to contribute large amounts really should consider all their options with a good IFA.

Treatment of pension on divorce can also be a consideration. In general if an asset is liquid - e.g. those ISAS's - then it's value will simply be chucked in the marital pot and split according to what decreed fair or negotiated. Pensions can be, in many ways, treated more favourably to their nominal owner on divorce. It is quite common for something considerably less than the transfer value (or in the case of occupational schemes more than the CETV) to be considered as marital asset.

A further advantage of pension of other assets is that they are not generally included in means testing of benefit, thus should one have to throw oneself at the mercy of the state you will get nothing until you have basically spent all the ISA.

Whilst there are disadvantages with pensions in terms of what you can actually do with them at retirement for most people the advantages probably overrule this.

But it all depends upon the individual. Certainly anybody intending to contribute large amounts really should consider all their options with a good IFA.

This is true whether it is for large or small amounts. I agree with a lot of what you have said, especially the part about treatment of pension on divorce.

However, overall Pensions are still the most tax effient investment vehicle available to contractors.

I always use this example when explaining the process to clients:

Tax Relief - How It Works

Let's say you are a contractor with a limited company, not caught by IR35, and you are a higher rate tax payer. You'll probably be taking a low salary, and drawing the rest of your income in dividends.

For £100 of company gross profit: when you pay dividends, first you pay corporation tax of 21% (£21) leaving a dividend of £79. Then you pay further tax on the dividend of 22.5% (£17.78), leaving you with £61 in your pocket. You've just paid the Revenue £39 for the privilege of having £61 in your hand now.

But if you contribute to your pension: Instead of taking £61 now, the company makes a £100 contribution to your pension. In reality £25 of your contribution represents the part of the pension fund which you can draw tax free when you are retire - it also has the opportunity to grow and be worth considerably more than this initial investment. £36 pounds also go into the pension fund, together with the £39 that would have gone to the taxman (quite a decent return). This £75 can also grow and be used to skim off an income at a later date, or buy an annuity.

This is what it means to say you get 39% tax relief. It's the percentage of tax saving you get - the amount you can channel to your pension, rather than the tax man. And remember, all that money invested starts earning interest straight away. For higher rate contractors caught by IR35, the tax relief is 48%.

John Yerou

[Freelancer Financials]

For reference, my wage is £1,000 per month and my pension contribution is £605 per month. This seems to be Ok, well no one has said anything about it during the last two years.

You will have absolutely no problem with that. By the way you can contribute up to your total pre-taxed earings.

[ASB]

I agree, in limited and specific circumstances you can take this approach.

Pension contributions are undoubtedly tax efficient whether you are caught by IR35 or outside. But if you do not wish to utilise all the company’s profits in this way you can also consider other tax effective strategies for withdrawing the retained profit from your company. Under the correct circumstances you can distribute funds on dissolution of a company by way of a capital distribution [extra statutory concession C16]. Combined with entrepreneur relief profits withdrawn in this way attract 10% personal tax rate. The effective rate of tax is even less if annual capital gains tax allowances are otherwise unused.

Once again, I stress that this approach needs to be approved and supported by your accountant.

John

I'd take a bit of issue with "pensions are undoubtedly tax efficient". Certainly they appear so on the surface, but if one considers isas etc - at least to the level it is possible to contribute - then these are also tax efficient. In effect with a pension offers tax deferment - because the return is largely taxed at the point of receipt. If effect if you are tax at the same rate in retirement as you are in work then it is broadly neutral. If you were a normal rate taxpayer in work and a higher rate payer in retirement then it could be to your detriment. However, the benefit of age allowances and the 25% tax free sum does tend to put the benefit on pensions. It would be unusual - but possible - for an individual in specific circumstances uses other asset classes to fund retirement options.

The real saving, in my view, with pension contributions comes from NI savings. And that if of particular importance to anybody who is IR35 caught. Of course that requires corporate contributions.

Ultimately a case can be made for using full ISA allowance and pension after. But it all depends upon the individual. Certainly anybody intending to contribute large amounts really should consider all their options with a good IFA.

Treatment of pension on divorce can also be a consideration. In general if an asset is liquid - e.g. those ISAS's - then it's value will simply be chucked in the marital pot and split according to what decreed fair or negotiated. Pensions can be, in many ways, treated more favourably to their nominal owner on divorce. It is quite common for something considerably less than the transfer value (or in the case of occupational schemes more than the CETV) to be considered as marital asset.

A further advantage of pension of other assets is that they are not generally included in means testing of benefit, thus should one have to throw oneself at the mercy of the state you will get nothing until you have basically spent all the ISA.

Whilst there are disadvantages with pensions in terms of what you can actually do with them at retirement for most people the advantages probably overrule this.

[worzelGummidge]

For reference, my wage is £1,000 per month and my pension contribution is £605 per month. This seems to be Ok, well no one has said anything about it during the last two years.

[thunderlizard]

Blimey thanks Mr Freelancer Financials for giving up your Friday and Saturday nights to answer my question of 5 years ago

In the event we didn't set up any employer contributions. Accountant didn't reckon there was much tax difference either way - both then, and again a couple of months ago.

Thanks for the other replies too, I hope it's thrown up some useful info for others.

tl

[Freelancer Financials]

Same here, I find it better than lump sums as you can then automate everything and find less reasons to spend the money on something else.
But at the moment I limit pension contributions to match my NMW-ish salary.
If I wanted to double my company pension contributions (so they are double my company salary but still only a quarter of total company profit) is this considered "taking the piss" by HMRC or not?

That should be fine. The annual amounts must simply not be very much larger than your actual declared annual corporate income.

John