Reply to: Director's pension, salary and dividend

[Martin at NixonWilliams]

Now, these were swapped to salary sacrifice. I went for this because of the minor 1 or 2% (can't remember which) effective NI saving.

It could've been either rate depending on when you did it, although it has been 2% for a number of years now.

I'm just starting to think the I might be better off paying part of the personal contributions personally rather than salary sacrifice. I had originally concluded it made no difference, but think I'd better redo the calcs both way before next years election.

If you remain in permanent employment it is unlikely to make much of a difference, I would probably keep it as it is if it were me.

People often refer to the tax saving on pension contributions as being 20% (BR) or 40% (HR), which is true when your income consists of salary only. What people often miss is that a higher rate taxpayer whose income consists of a small salary and dividends actually saves 42.5% rather than 40% as there is 20% given at source plus another 22.5% via the extension of the basic rate band.

[ASB]

If by threshold you mean salary or other earned income then yes, I agree this is generally the best approach.

Yes, thats exactly what I meant. Which actually reminds me of something........

I'm a permie. Higher rate tax payer.

My pension arrangements are:-

1) I pay 5%
2) Company pays 10%
3) I pay additional 20% (or something like that).

Now, these were swapped to salary sacrifice. I went for this because of the minor 1 or 2% (can't remember which) effective NI saving. Bit mean getting no uplift since co saves full ER's NI. And CT at the main rate. (But I guess the latter is neutral).

I'm just starting to think the I might be better off paying part of the personal contributions personally rather than salary sacrifice. I had originally concluded it made no difference, but think I'd better redo the calcs both way before next years election.

Coincidentally the amount I pay in contributions gets me down to a basic rate taxpayer (well nearly does).

edit: intuitively I think I am slightly ahead of the game by salary sacrifice in my circumstances; but think I need to recheck just in case.

[Martin at NixonWilliams]

I can't really be bothered to calculate dividend cases, but if planning on large pension payments I think it is usuallu to benefit to pay personal contributions up to your threshold and company contributions beyond.

If by threshold you mean salary or other earned income then yes, I agree this is generally the best approach.

[ASB]

ASB, everything you have said above is correct.

Those with the smaller salaries will benefit from the extension of the basic rate band if their dividends exceed the higher rate threshold. They do not need to have suffered the tax in the first place in order to get the relief.

This is different to somebody on a salary of say, £50,000, who would pay the tax first and receive a refund, though this should only happen in the first year of contributing as HMRC would seek to adjust your tax code where regular contributions are being made. I assume this is where you are coming from in your final paragraph?

In effect Martin, yes. The situation for 90 right to achieve "maximum bang for the buck" depends on his overall circumstances. Using various extreme possibilities:-

50k gross profit. Straight into pension as co contribution. 50k in pension.

50k gross profit. 10k salary. Er's NI = nil due to rebate. 40k in company pension.

Net salary = 9711 (289 ee's ni). Chuck it in a pension. = 9,711 * 1.25 (BR relief) = 12138.75 + 40k = 52138.75.

I can't really be bothered to calculate dividend cases, but if planning on large pension payments I think it is usuallu to benefit to pay personal contributions up to your threshold and company contributions beyond.

[Martin at NixonWilliams]

ASB, everything you have said above is correct.

Those with the smaller salaries will benefit from the extension of the basic rate band if their dividends exceed the higher rate threshold. They do not need to have suffered the tax in the first place in order to get the relief.

This is different to somebody on a salary of say, £50,000, who would pay the tax first and receive a refund, though this should only happen in the first year of contributing as HMRC would seek to adjust your tax code where regular contributions are being made. I assume this is where you are coming from in your final paragraph?

[ASB]

£512 is the net contribution, i.e. 80% of the maximum gross contribution allowed (£640) in order to receive tax relief.

The gross pension contributions extend the basic rate band and so the higher rate threshold will be higher with each contribution that is made.

I'm confused. I agree that is the overall effect if you are actually a taxpayer, but has the mechanism for obtaining relief changed ?

Say you earn, nil. You pay 2,880 into a pension. The scheme provider reclaims 720 representing br relief. You have 3600 in your pot. Even though you have no taxable income.

Say you earn 8,000. And pay it into a pension. The scheme provider reclaims 2,000. 10k in the pension. (Even though no tax paid).

If you are a higher rate payer then you claim relief above BR on your tax return. Depending on the calculation method this presumably has the effect of extending your basic rate band by that amount.

Thuse those with low income (in terms of salaries) can get an additional bonus, because they can get relief for tax which wasn't actually paid in the first place.

[90 Right]

The basic rate band is £32,010, this is extended by the gross value of the contributions made. If you have made 12 gross contributions of £640 the basic rate band will be £39,690.

The total amount of (net) dividends available before reaching the higher rate threshold is therefore £37,305 (£41,450 gross).

I hope this helps.

Martin

Thanks Martin, that's really helpful

[Martin at NixonWilliams]

Where does the £512 maximum come from?

Anyway, the pension contribution is irrelevant in calculating how much dividend you can take before hitting the higher tax band.

£512 is the net contribution, i.e. 80% of the maximum gross contribution allowed (£640) in order to receive tax relief.

The gross pension contributions extend the basic rate band and so the higher rate threshold will be higher with each contribution that is made.

[DirtyDog]

Hello everyone, been lurking for a while now since setting up my own co' a couple of years ago, but this is my first post so please go easy........

If as a director of your co' you pay yourself a salary of £640/m and you then contribute the maximum (£512/m) to a pension via net pay arrangement. How much dividend can you take before paying any tax?

Cheers in advance

Where does the £512 maximum come from?

Anyway, the pension contribution is irrelevant in calculating how much dividend you can take before hitting the higher tax band.

[Martin at NixonWilliams]

I pay £640 a month and a £30k dividend at the start of the tax year to live off for the next 12 months. No higher rate liability

The basic rate band is £32,010, this is extended by the gross value of the contributions made. If you have made 12 gross contributions of £640 the basic rate band will be £39,690.

The total amount of (net) dividends available before reaching the higher rate threshold is therefore £37,305 (£41,450 gross).

I hope this helps.

Martin

[ASB]

Hello everyone, been lurking for a while now since setting up my own co' a couple of years ago, but this is my first post so please go easy........

If as a director of your co' you pay yourself a salary of £640/m and you then contribute the maximum (£512/m) to a pension via net pay arrangement. How much dividend can you take before paying any tax?

Cheers in advance

I cannot think of any circumstance in which it makes a difference. The pension contribution does not affect your taxable income.

I do not understand this appareng naximum of 512 you are talking about. Personal contributions are generally limited to 100% of salary. Company ones unlimited (but inefficient over 50k reducing to 40 k)

edit. I see where you get the 512 from. But I dont believe it works that way. Limit is gross salary not net salary; in any event the salary you desctibe would not of itself give a ta liability.

I suspect you may be looking for maximum efficiency. The key here is to make personal payments of up to the de minimus limit, since you get relief on that even though no tax has been paid. Or up to your personal allowance if you have income for the same reason. Or up to your salary if it is between the two.

It is not worth increasing salary to pay more pension. Due to ni. Corporate conributions are better. And ir35 proof. There may be rare occasions where if you have other salary personal contributions are better.

I did produce a set of worked examples a couple of years back. Demonstrating the amount that ended up in your pot. It may no linger be entirely accurate. In any event individual circumstances change it but the general rule was:

get as much free relief against untaxed personal income
dont pay salary to increase potential contributions
corporate contributions were marginally more efficient under most circumstances
higher rate taxpayers it is more dependant on sources of all income

[northernladuk]

Hello everyone, been lurking for a while now since setting up my own co' a couple of years ago, but this is my first post so please go easy........

If as a director of your co' you pay yourself a salary of £640/m and you then contribute the maximum (£512/m) to a pension via net pay arrangement. How much dividend can you take before paying any tax?

Cheers in advance

What does your accountant say?

[90 Right]

Hello everyone, been lurking for a while now since setting up my own co' a couple of years ago, but this is my first post so please go easy........

If as a director of your co' you pay yourself a salary of £640/m and you then contribute the maximum (£512/m) to a pension via net pay arrangement. How much dividend can you take before paying any tax?

Cheers in advance

[DirtyDog]

I assumed that the OP has been declaring dividends and has not been living on £640 per month!

I pay £640 a month and a £30k dividend at the start of the tax year to live off for the next 12 months. No higher rate liability

[Martin at NixonWilliams]

Assuming no other income, my maths says that there won't be a higher tax rate liability to pay.

I assumed that the OP has been declaring dividends and has not been living on £640 per month!