Reply to: Pensions Pensions Pensions

[northernladuk]

Right so personal contributions are limited to salary? Not salary+dividends (i.e. £7K for some of us)?

Not sure if I've read it right but my accountant seems to be saying otherwise.... (Or has this changed recently?)

If this limit is there then I guess it makes sense to use company contributions? Or can you do £7 personal and rest company? (Or cant you mix in same fund)?

Why are you resurrecting every pension thread you can find? This one is over a year old???

Just speak to your accountand and get on with it. You worry too much.

[psychocandy]

You are limited to £12k personal contribution but there is no limit to your company's contribution. Dividend payments have no affect whatsoever.

Right so personal contributions are limited to salary? Not salary+dividends (i.e. £7K for some of us)?

Not sure if I've read it right but my accountant seems to be saying otherwise.... (Or has this changed recently?)

If this limit is there then I guess it makes sense to use company contributions? Or can you do £7 personal and rest company? (Or cant you mix in same fund)?

[SackmanandCo]

nah, I'm too much of a wimp!

[Stag Cozier]

[SackmanandCo]

Technical explanations are better explained over the phone rather than in writing. Happy to explain in detail to anyone how I have derived them. Rest assured, they are correct for an individual with less than £150k of personal income trading through a limited company.

I have focused on higher rate taxpayers because the tax breaks on pensions are more suitable to them

[pmeswani]

£79 dividend in cash terms is taxed at 25% for a higher rate tax payer. Dont worry about tax credits- us accountants talk too technical

Sorry for interfering in this interesting debate between you and *Clare*. But what are you basing the higher rate tax payer on? Are you advising your clients to take a higher rate of pay + Dividends? If so, please can you advise us of your rationale? I appreciate that being on a higher rate of pay has benefits from a pension point of view, but what other rationale?

[Clare@InTouch]

£79 dividend in cash terms is taxed at 25% for a higher rate tax payer. Dont worry about tax credits- us accountants talk too technical

Right - so you're assuming that it's a higher rate taxpayer. Personally I don't think you can apply an overall rate on the assumption that all income is taxed at higher rates because it takes no account of income at lower rates, so is misleading for clients.

Your example was £100 income less £21 CT = profit of £79. 25% higher rate tax = £19.75.

How does that give a 40.75% tax rate? 21% CT plus 25% IT = 46%.

Adding the CT rate to the actual tax suffered in higher rates gives a mixed percentage/£ figure of 40.75.

[SackmanandCo]

£79 dividend in cash terms is taxed at 25% for a higher rate tax payer. Dont worry about tax credits- us accountants talk too technical

[Clare@InTouch]

100-21=79
79-19.75=59.25

=tax of 40.75%

So if you have a turnover of £100 and pay CT of £21 - that leaves a profit of £79.

If you're below higher rates you can withdraw that as a dividend - 0%
If you're in the basic rate band it will be 32.5% - less the tax credit - 22.5%
If you're in the additional rate band it goes up to 42.5%

Income tax is 20% 40% or 50%.


What's your 19.75%?

[SackmanandCo]

How are you getting 41%?

100-21=79
79-19.75=59.25

=tax of 40.75%

[Fred Bloggs]

I prefer to keep the minimum to cover taxes etc in the Ltd Co account as a rule. I draw divs and a small salary up to the 40% threshold, the rest of the turnover goes into my SIPP from the Ltd Co.

[Robot]

Just a thought

Although you get tax relief on the way, you pay tax when you withdraw it as a pension pot (bar the 25% lump sum).

You know the tax savings now but you have no idea of the amount of tax you will pay when you draw down your pension.

Why not keep the money in the company, when you retire and you can draw down your BRB year on year until the reserves in the company have gone, plus you have instant access to the funds if you require it, you don’t have that option with a pension.



Robot

[Clare@InTouch]

It costs approx 41% to extract monies from a limited comapny

How are you getting 41%?

[lje]

A company pension scheme is normally better than a private one because Company gets tax relief at 21% plus avoid personal tax on dividends of 20% whereas private contributions are paid out of net income

Private contributions may be paid out of net income but then the tax is claimed back (by a combination of the pension company themselves (up to the 40% tax band) and personally in your self assessment (for any extra tax relief of you are in the 40% tax band).

So it all works out the same... In theory... In actual fact the difference is that if you pay it from personal income then you have payed employer's and employee's national insurance on the money (assuming you have a high enough salary to have to pay these).

It is also worth noting that up to the 40% tax band there is no extra tax payable on the net dividends received from your limited company. Anything over the 40% limit but under the 50% limit you have to pay an extra 22.5% of the gross dividend amount. Anything over the 50% limit you have to pay an extra 32.5% of the gross amount.

[SackmanandCo]

It costs approx 41% to extract monies from a limited comapny