Best way to pay extra income into pension...

[northernladuk]

Quite right! Apologies.

Don't bow down to these damn pedants. Respond with...


their

Incorrect capitalisation is just as heinous

[Danielsjdaccountancy]

THEIR

Quite right! Apologies.

[IR35 Avoider]

I currently pay myself a 12k salary and 28k dividends so any extra income attracts a higher tax rate. I have some extra income coming in as a sole trader, I'd like to put this income into a pension and not pay the higher rate of tax. I was wondering whether there is any difference with the following solutions?

1. Adjust my salary to compensate for the extra income and pay into my pension from my ltd.

Eg, for 3k income as a sole trader:
- Salary from ltd becomes 9k
- 3k sole trader income is taxed as personal income
- 3k is paid into pension from the ltd

2. Keep the salary the same and pay the extra income direct into the pension. With this solution I am also not sure how much I need to pay into the pension. In this instance, does anyone know how much I need to pay into the pension (personally) to offset say 3k income at the higher tax rate?

If there are no difference between the two options then I would prefer option 2 as the extra income would vary from year to year.

I know this is a question for my accountant but he is always conveniently 'in a meeting'.

Thanks in advance!

What I would do in your situation is
1. Reduce salary to 7K regardless of anything else, to save NI.
2. Keep total taxable income just below higher rate by adjusting dividend income as appropriate after taking into account salary and sole trader income.
3. Possibly retain some of the leftover money within the company to use to pay salary and dividends in a bad year or to be distributed when not working. The retained money can be invested.
4. Pay employer pension contributions out of any remaining money.

I would only pay dividends or retain earnings in the company if I were confident of IR35 status. If any doubt, note that pension contributions are insulated against IR35 risk.

[Waldorf]

Hi Hmmm,

Can you PM me the name of your accountant please and I'll ensure they meet with you to discuss this.

Yes we do provide face to face meetings but our accountants plan they're day so they have time for any call backs if requested also.

Thank you

THEIR

[ASB]

In terms of what the pension gets and overall taxation it makes no difference if:-

1) You pay a company contribution of 3k
2) You pay a personal contribution of 2,400 (yes the 3k only yields 1800 but you get the extra 600 in tax relief through your s/a return)

The issue is NI. If you have s/e income check that you do not require to pay any class 2 or class 4 NI; though the point is probably moot since you will suffer these if they are appropriate irrespective of whether you happen to finance a pension with the money or not.

[Joeman]

As I understand it, when you pay your own money into a personal pension, the pension provider claims 20% tax relief on that amount and your contribution effectively increases - i.e. pay in £2,400 and your pension balance will actually increase by £3,000.

Your LTD Company can contribute to your pension from Pre-Tax profits, so if you pay direct from the company, you save 20% corp tax.

[Danielsjdaccountancy]

Thankyou everyone, this is really helpful.

The 12k was suggested by my accountant (SJD) so I may review this. I've just paid 1k pension personally (done yesterday to open my account) so I will do as suggested and make future pension plans via the company.

Thankyou all again!

Hi Hmmm,

Can you PM me the name of your accountant please and I'll ensure they meet with you to discuss this.

Yes we do provide face to face meetings but our accountants plan they're day so they have time for any call backs if requested also.

Thank you

[hmmm]

Thankyou everyone, this is really helpful.

The 12k was suggested by my accountant (SJD) so I may review this. I've just paid 1k pension personally (done yesterday to open my account) so I will do as suggested and make future pension plans via the company.

Thankyou all again!

[psychocandy]

Option 1. Company contributions direct to the pension will save you on employee NI and employer NI. aka. Salary sacrifice.

Will leave it to someone else to ask why 12k.

7K is the way....

[MrRobin]

As I understand it, when you pay your own money into a personal pension, the pension provider claims 20% tax relief on that amount and your contribution effectively increases - i.e. pay in £2,400 and your pension balance will actually increase by £3,000. If you are a higher rate tax payer, then you can claim back the extra difference on your tax return. Thus, in effect you are quids in because you don't pay as much into the pension and you get the rest back in an increased personal allowance.

Do you realise that you could save yourself about a grand in NI payments if you adjusted your salary to £7500 and dividends to £32,500?

[Contreras]

Option 1. Company contributions direct to the pension will save you on employee NI and employer NI. aka. Salary sacrifice.

Will leave it to someone else to ask why 12k.

[Lewis]

I currently pay myself a 12k salary and 28k dividends so any extra income attracts a higher tax rate. I have some extra income coming in as a sole trader, I'd like to put this income into a pension and not pay the higher rate of tax. I was wondering whether there is any difference with the following solutions?

1. Adjust my salary to compensate for the extra income and pay into my pension from my ltd.

Eg, for 3k income as a sole trader:
- Salary from ltd becomes 9k
- 3k sole trader income is taxed as personal income
- 3k is paid into pension from the ltd

2. Keep the salary the same and pay the extra income direct into the pension. With this solution I am also not sure how much I need to pay into the pension. In this instance, does anyone know how much I need to pay into the pension (personally) to offset say 3k income at the higher tax rate?

If there are no difference between the two options then I would prefer option 2 as the extra income would vary from year to year.

I know this is a question for my accountant but he is always conveniently 'in a meeting'.

Thanks in advance!

I'm no expert but as I understand it ....

For 2, at self assesment your tax allowance increases by the amount paid into your pension personally. i.e. if you get an extra £3K from self employment and pay that all into your pension then you will pay no more tax than if you hadn't got the £3K. But you can only pay up to 100% of your salary personally (and get tax relief) whereas paying from a ltd co., the tax advantage is gained on all money paid into your pension.

[hmmm]

I currently pay myself a 12k salary and 28k dividends so any extra income attracts a higher tax rate. I have some extra income coming in as a sole trader, I'd like to put this income into a pension and not pay the higher rate of tax. I was wondering whether there is any difference with the following solutions?

1. Adjust my salary to compensate for the extra income and pay into my pension from my ltd.

Eg, for 3k income as a sole trader:
- Salary from ltd becomes 9k
- 3k sole trader income is taxed as personal income
- 3k is paid into pension from the ltd

2. Keep the salary the same and pay the extra income direct into the pension. With this solution I am also not sure how much I need to pay into the pension. In this instance, does anyone know how much I need to pay into the pension (personally) to offset say 3k income at the higher tax rate?

If there are no difference between the two options then I would prefer option 2 as the extra income would vary from year to year.

I know this is a question for my accountant but he is always conveniently 'in a meeting'.

Thanks in advance!