SIPP contributions - personal vs via Ltd Company

[SteveJ]

Thanks guys

Sounds like company contributions are the way to go, ta.

[Craig at Nixon Williams]

Good point!

You must also earn as much as you wish to contribute during that year.

For example - say I had unused allowances for £25,000 from the past 3 years plus my £50,000 allowance this year, I could make a contribution of £125,000 to my pension - however I must earn at least £125,000 this year in order to do this. My earnings from the previous 3 years would not count towards this.

Craig

[IR35 Avoider]

In order to use unused allowance from previous years, you do actually have to have had a pension scheme then, even if you didn't contribute to it.

[IR35 Avoider]

Remember in this example, the maximum that you can contribute to a pension each year is £50,000.

Craig

Yes, sorry I was forgetting the limit which was introduced more recently. It is going down to £40,000 for 2014/2015

[Craig at Nixon Williams]

Can you use previous year's allowances if you didn't contribute the full £50,000 last year?

Yes, you can actually utilise unused allowances from the previous three pension input periods (this may not be the same as the tax year).

Also, the £50,000 previously mentioned is being reduced to £40,000 in 2014/15.

Craig

[eek]

Remember in this example, the maximum that you can contribute to a pension each year is £50,000.

Craig

Can you use previous year's allowances if you didn't contribute the full £50,000 last year?

[Craig at Nixon Williams]

Pension contributions from the company count than same as salary and employers NI in achieving the target of payroll costs of 95% for IR35 purposes.

So if turnover is £100,000 and IR35 says £95,000 must go as payroll cost, you could pay salary of £7000 and pension contribution of £88,000.

If you make personal contributions you will pay aprox. 20% NI on that money which you don't get tax relief for when you make a pension contribution.

In short, paying contributions from the company is a massively better option.

Remember in this example, the maximum that you can contribute to a pension each year is £50,000.

Craig

[IR35 Avoider]

one thing to remember is even if paying it from the company you need to pay NI on the amount,

No you don't pay NI on employer contributions.

I think the link you gave further down refers to the case where you make personal contributions that are automatically deducted from your salary by your employer to go into a company-run scheme. The fact that the employer deducts them doesn't make them employer contributions.

This scenario is only applicable to large companies that run their own pension schemes to which employees make personal contributions. My wife's employer used to do this, but these days they have switched to making all contributions by salary sacrifice, i.e you choose to have lower salary in exchange for the employer make an employer-contribution.

[IR35 Avoider]

Pension contributions from the company count than same as salary and employers NI in achieving the target of payroll costs of 95% for IR35 purposes.

So if turnover is £100,000 and IR35 says £95,000 must go as payroll cost, you could pay salary of £7000 and pension contribution of £88,000.

If you make personal contributions you will pay aprox. 20% NI on that money which you don't get tax relief for when you make a pension contribution.

In short, paying contributions from the company is a massively better option.

[Craig at Nixon Williams]

If you make a company contribution, to get £100 into the pension you pay £100 from the company and therefore save £20 from your CT bill.

If you make a personal contribution then to get £100 into the pension you will need to pay £80 and the pension and the pension provider will claim £20 from HMRC. In addition to this, your higher rate tax threshold will increase by £100 meaning that you can take an extra £90 out of the company before paying higher rate tax.

Paying personally is more tax efficient than a company contribution, however the maximum that you can get tax relief on personally is 100% of your salary, which in the case of contractors tends to be relatively small.

In the case of the OP (who is caught by IR35) it is far more tax efficient to make company contributions because these will be classed as a qualifying deduction in the IR35 calculation and will therefore reduce the salary that has to be paid...he will therefore save a lot of tax and NI by making company contributions.

Hope this helps!
Craig

[Contreras]

If you pay it from your personal account you will get 20% Tax Relief if a basic payer, so for every £100 you put in the Govt will ad another £20. If you pay from the company £100 will only "cost" you £80 as you can deduct it from Corp Tax, so its marginally cheaper to do it from the company (£80 from the company or £83.33 from personal will give you £100 in your SIPP), one thing to remember is even if paying it from the company you need to pay NI on the amount, if as you say your are within IR35 and see it continuing there is no company profit, no corp tax so no saving

Sorry but I'm pretty sure that is not correct. With CT and basic rate tax both at 20% it should be cost neutral. A personal contribution of £80 is topped up by £20 from the govt. For higher rate tax payers there is apparently a marginal benefit in making a personal contributions to a certain limit before continuing with direct company contributions, but I haven't done the sums because it doesn't affect me.

And there is no NI to pay on contributions made directly from the company to the pension scheme. These are company expenses plain and simple. The confusion may be employee vs. employer vs. company contributions. I know because I got in a stew about this after I set up mine and someone told me the NI should have been due, even the PCG helpline said so, but it was mis-information.

So the real winner is in NI saving (meaning company contributions are usually best). But it will significantly affect the IR35 calculations too, pension contributions are an allowable company expense for IR35 purposes.

[SimonMac]

Pay NI on pension contributions?

Yep, I thunk

http://www.hmrc.gov.uk/incometax/relief-pension.htm

Occupational or public service pension schemes
Usually your employer takes the pension contributions from your pay before deducting tax (but not National Insurance contributions).

[eek]

If you pay it from your personal account you will get 20% Tax Relief if a basic payer, so for every £100 you put in the Govt will ad another £20. If you pay from the company £100 will only "cost" you £80 as you can deduct it from Corp Tax, so its marginally cheaper to do it from the company (£80 from the company or £83.33 from personal will give you £100 in your SIPP), one thing to remember is even if paying it from the company you need to pay NI on the amount, if as you say your are within IR35 and see it continuing there is no company profit, no corp tax so no saving

YMMV depending on exact circumstances

Pay NI on pension contributions?

[SimonMac]

Hi all,

I am working through my own Ltd company but my current contract is inside IR35. Is there any financial difference between the company making contributions to my SIPP vs me making personal contributions? I understand one of the main advantages of the company making contributions is that it reduces the company's profits and hence corporation tax, but since I'm inside IR35 the company makes very little profit anyway as almost everything is paid out as salary.

Cheers.

Steve

If you pay it from your personal account you will get 20% Tax Relief if a basic payer, so for every £100 you put in the Govt will ad another £20. If you pay from the company £100 will only "cost" you £80 as you can deduct it from Corp Tax, so its marginally cheaper to do it from the company (£80 from the company or £83.33 from personal will give you £100 in your SIPP), one thing to remember is even if paying it from the company you need to pay NI on the amount, if as you say your are within IR35 and see it continuing there is no company profit, no corp tax so no saving

YMMV depending on exact circumstances

[SteveJ]

Hi all,

I am working through my own Ltd company but my current contract is inside IR35. Is there any financial difference between the company making contributions to my SIPP vs me making personal contributions? I understand one of the main advantages of the company making contributions is that it reduces the company's profits and hence corporation tax, but since I'm inside IR35 the company makes very little profit anyway as almost everything is paid out as salary.

Cheers.

Steve