Reply to: Noob SIPP question for company owners

[Jessica@WhiteFieldTax]

Resurrecting this discussion to get some clarification.

1) I have my own LTD and set up a Stakeholder Pension Plan (SPP) where I pay each year up to the max 50K (40K from this coming year) whereas my annual salary is only 15K, plus dividends. I assumed it was OK and wasn't challenged by my accountant, did I get it wrong?

2) If I transfer my SPP into a SIPP, can I continue paying the annual 40K in the SIPP directly from the company, with the same tax advantage? (I would prefer a SIPP to reduce the costs, but only if it provides the same advantage)

Many thanks

1 On facts given, you are correct and did not get anything wrong. However the allowance is already £40k, not £50k and coming down - changed for 14/15.

2 You should be able to transfer your existing pension into a SIPP. Any pension arrangement that can be transferred into a SIPP won't compromise your tax relief on the SIPP contributions, other than anything that's gone into the other pension this year counts towards the £40k. However pension transfers aren't the most straightforward of things, so seek advice from a pensions technical expert at your SIPP provider.

[Miao]

Stakeholder Pension Plan vs SIPP

Resurrecting this discussion to get some clarification.

1) I have my own LTD and set up a Stakeholder Pension Plan (SPP) where I pay each year up to the max 50K (40K from this coming year) whereas my annual salary is only 15K, plus dividends. I assumed it was OK and wasn't challenged by my accountant, did I get it wrong?

2) If I transfer my SPP into a SIPP, can I continue paying the annual 40K in the SIPP directly from the company, with the same tax advantage? (I would prefer a SIPP to reduce the costs, but only if it provides the same advantage)

Many thanks

[lje]

One question in here if I may - I am looking to set up a SIPP for myself and have the company pay into it as above, and also transfer in some other pensions I have.

Is there any differennce, be it legally, IR35-status or anything, between:

- Me setting it up myself (i.e. personally) and then effectively telling myco about it so they can make the payments
and
- Myco setting it up in my name or whatever.

The first seems more straight-forward, parciularly if I cease trading at some point in the (distant future).

I don't know what the legal differences are between the two options. However, it's perfectly OK for your company to pay contributions into your personal pension.

[imightbewrong]

One question in here if I may - I am looking to set up a SIPP for myself and have the company pay into it as above, and also transfer in some other pensions I have.

Is there any differennce, be it legally, IR35-status or anything, between:

- Me setting it up myself (i.e. personally) and then effectively telling myco about it so they can make the payments
and
- Myco setting it up in my name or whatever.

The first seems more straight-forward, parciularly if I cease trading at some point in the (distant future).

[lje]

I'm also looking at Pensions and the more I read the more confused I get!

Are you all saying that pension contributions effectively reduce the CT a company pays whilst also providing a pension for the Director?

Eg
Turnover 120,000
Expenses 20,000
Profit 100,000
Corp Tax @ 21% = 21,000

With a pension
Turnover 120,000
Expenses 20,000
Pension contribution pa 50,000
Profit 50,000
Corp Tax @ 21% = 10,500


I also see that a lot have said you can only contibute up to 100% of your salary. If most pay a salary of £5k - £7k then is that the limit you can invest in a year? Surely that can't be right as no Director is going to pay themselves a salary of £50k, just to make the most of the full pension contribution allowance?

Yes - your CT calculation example is corect.

Also, your limit when paying from the company is £50k, because this isn't a personal contribution. The limit when paying as an individual is your salary for the year.

If in the future you are deemed to have been within IR35 then your pension payment from the company is subtracted from the revenue before other calculations are made. So if you have a revenue of 120k and pay a pension of 50k only 70k would be treated as subject to IR35.

[imightbewrong]

I'm researching this very topic now - your figures are correct as I understand it.

I too was confused by this '100% of salary' thing, but I think as a director you can bypass that, as it can be treated as a 'business expense' rather than an actual salary payment.

The answer appears to lie in this

[youngguy]

I'm also looking at Pensions and the more I read the more confused I get!

Are you all saying that pension contributions effectively reduce the CT a company pays whilst also providing a pension for the Director?

Eg
Turnover 120,000
Expenses 20,000
Profit 100,000
Corp Tax @ 21% = 21,000

With a pension
Turnover 120,000
Expenses 20,000
Pension contribution pa 50,000
Profit 50,000
Corp Tax @ 21% = 10,500


I also see that a lot have said you can only contibute up to 100% of your salary. If most pay a salary of £5k - £7k then is that the limit you can invest in a year? Surely that can't be right as no Director is going to pay themselves a salary of £50k, just to make the most of the full pension contribution allowance?

[IR35 Avoider]

Some of the early replies were very misleadingly put, so let me expand on what I said earlier:-

Money paid as employer contributions bypasses whatever combination of income tax, corporation tax and NI would otherwise apply. Money paid as personal contributions only gets income tax refunded.

Money paid as employer contributions is IR35-proof: in respect of that money, it doesn't matter whether you are investigated. If you pay dividends and make pension contributions, the dividends can later be taxed as salary if you fail IR35.

[Fred Bloggs]

Let me make this simple: all contributions should be employer single contributions from your company. Compared to paying yourself income taxed at the basic or higher rates, out of which you pay personal contributions, paying employer contributions will give you the same or a greater reduction in your tax bill.

Yes if you pay yourself only the personal allowance as salary then you can make a small contribution out of that and get "tax back" on money that hasn't been taxed. Getting tax relief on £3600 is a sideshow when you could be avoiding tax and NI on up to £50,000, while IR35-proofing that money.

Agreed. Even better, for every £50k you put into the SIPP, you get to take £12.5k straight out again entirely tax free (if you're over 55).

[IR35 Avoider]

Let me make this simple: all contributions should be employer single contributions from your company. Compared to paying yourself income taxed at the basic or higher rates, out of which you pay personal contributions, paying employer contributions will give you the same or a greater reduction in your tax bill.

Yes if you pay yourself only the personal allowance as salary then you can make a small contribution out of that and get "tax back" on money that hasn't been taxed. Getting tax relief on £3600 (or £7000?) is a sideshow when you could be avoiding tax and NI on up to £50,000, while IR35-proofing that money.

[pmeswani]

That is misleading. By paying direct from the Ltd Co into the SIPP, you do not get tax relief, no. You simply do not pay any tax on that money, zero, zip, nothing to pay. As a bonus, that money is also IR35 investigation proofed too.

Which I mentioned in my previous post, which is my I didn't mention it again. I agree about the IR35 bit too, but IR35 investigations can be done based on working practices too.

[Fred Bloggs]

What I have neglicted to mention in my previous posts is that company contributions can be higher than your salary, but they do not incur any tax relief from HMRC

That is misleading. By paying direct from the Ltd Co into the SIPP, you do not get tax relief, no. You simply do not pay any tax on that money, zero, zip, nothing to pay. As a bonus, that money is also IR35 investigation proofed too.

[pmeswani]

I don't think this is right.

I have put double my salary straight into a SIPP from the company account for 3 years, it was approved by my accountant and hasnt been picked up on by HMRC.

The Upper limit of pensions contribution is coming down to £50K a year from next year.

Have a look at How a personal pension works | Business Link.

If you earn £3,600 or more in any year, you can contribute an amount equal to 100 per cent of your earnings and still get income tax relief, as long as the amount is not more than the annual allowance, which is set every year by HMRC. In 2009-10 the annual allowance is £245,000. You can pay in more but you won't get tax relief on the excess amount.

How HMRC defines earnings is probably debatable, but if I were you, I would seek clarification. My understanding is that earnings, in this case, is related to Salary and not total income (which normally includes Dividends). If I am wrong, then fair enough.

What I have neglicted to mention in my previous posts is that company contributions can be higher than your salary, but they do not incur any tax relief from HMRC

[Thejacka1]

Sorry, just reread your post and missed the point of your question. AFAIK (and IANAA), you can only contribute up to 100% of your Salary, and not 100% of your total income (i.e. Salary & Dividends). I can't remember off hand if SIPP's allow you to make AVC's or not. (By making AVC's, you won't get the 20% or 40% contributions on top. So you would be better off putting additional contributions from your business in order to reduce your Corp Tax bil by 21%).

Only way around this is to increase your PAYE Salary, pay the tax on the income and then contribute the amount into the SIPP.

HMRC will be entitled to reclaim the tax above the 100% contributions. (I don't know if they have tried it or not though!).

I don't think this is right.

I have put double my salary straight into a SIPP from the company account for 3 years, it was approved by my accountant and hasnt been picked up on by HMRC.

The Upper limit of pensions contribution is coming down to £50K a year from next year.

[pmeswani]

By paying salary, you are paying NIC's. By paying into the SIPP directly from the Ltd Co, you pay no tax on that money.

Not completely true on the Salary part. If your salary is £480 PCM, you don't pay any Income Tax or NIC's. However, if you decide to pay more than than that, fair enough.

But by paying NIC contributions, you are contributing to a full state pension (if it will still exist when you retire), so you will get 2 sets of pensions. One via the SIPP and the other via the state.

I'm going to start paying AVC NIC's from this year in order to ensure I get full State Pension for when I retire (assumption that it will still exist when I retire).