Reply to: National Insurance on Pension Contributions

[Martin at NixonWilliams]

My comments on CT are there because I assume if I am taking a dividend I would have paid the CT on the profits that that comes from.

I do see where you are coming from but there is no link between the two, it is only a coincidence that the basic relief is the same amount as the CT paid.

For example many companies pay a higher rate of CT but the directors of those companies will still only get basic rate tax relief of 20% for any personal contributions they make.

[Camnomis]

You are along the right lines but CT does not come into it where a personal contribution is made. The first 20% is an income tax relief.

You pay 80% of the contribution in order to receive 20% basic rate income tax relief, so if you pay £80 it is worth £100 as the pension provider collect the other 20% from HMRC.

You are correct in saying your basic rate band is extended by £100 to allow for higher rate tax relief.

My comments on CT are there because I assume if I am taking a dividend I would have paid the CT on the profits that that comes from.

[Martin at NixonWilliams]

If I pay myself the contribution as a dividend, and then pay that into my pension I will get the 20% back I paid as CT as Pension relief, however my threshold will rise by the total amount paid into my pension even though the dividend taken would only be ((11/10)*1.2)

You are along the right lines but CT does not come into it where a personal contribution is made. The first 20% is an income tax relief.

You pay 80% of the contribution in order to receive 20% basic rate income tax relief, so if you pay £80 it is worth £100 as the pension provider collect the other 20% from HMRC.

You are correct in saying your basic rate band is extended by £100 to allow for higher rate tax relief.

[Martin at NixonWilliams]

I would be concerned over "crossover"; e.g. you might give me the boost possible accounting advice, but I have selected the worst possible product. I wonder a bit about duty of care etc.

Certainly on various things I've found it can be difficult to get advice on purely a subset of the overall picture.

True, I could tell you the tax implications of making the contributions plus the effects of the annual & lifetime limits but I could not give advice on specific products. Likewise, an IFA is unlikely to be able to give any detailed advice in terms of tax planning / consequences of making the contributions.

We have often found that it helps to have an IFA and an accountant who will talk to one another. One instance I recall is where our client met with an IFA and came back from the meeting wanting to pay several thousands of pounds per year into his and his wife's pension. The wife was not really doing any work through the company and so we advised against this.

[Camnomis]

I must admit I don't understand how personal contributions impact salary/divvies and tax, so I just do them all from myCo.

I guess I am still thinking about my premie pension, and as if the contribution is coming from me rather than the company, I think I have the hang of it now.

If I pay myself the contribution as a dividend, and then pay that into my pension I will get the 20% back I paid as CT as Pension relief, however my threshold will rise by the total amount paid into my pension even though the dividend taken would only be ((11/10)*1.2)

His professional alter-ego. As he only has 7 posts (vs 13,832), he clearly doesn't see the need to be professional very often!

[mudskipper]

Simonmac sleeper sockie?

His professional alter-ego. As he only has 7 posts (vs 13,832), he clearly doesn't see the need to be professional very often!


I must admit I don't understand how personal contributions impact salary/divvies and tax, so I just do them all from myCo.

[jmo21]

Simonmac sleeper sockie?

[ASB]

Why get an accountant when you can get free advice on here? Just kidding.. OP - I would suggest appointing an accountant (one who understands the contractor market), there is a lot of advice out there in addition to the above that can make the whole process easier and more tax efficient for you.

I just wonder if it might be difficult to get appropriate advice. The problem may be the breadth of the subject and being appropriately regulated.

Certainly you will give competent advice on the taxation treatment of contributions, the effect if they are made personally, by corporate, the limits of relief, the overall effect on what gets paid into the pension.

But, the interaction over the effects of the pension itself, e.g. liftetime cap, is the selected pension appropriate and all that sort of gumph.

I would be concerned over "crossover"; e.g. you might give me the boost possible accounting advice, but I have selected the worst possible product. I wonder a bit about duty of care etc.

Certainly on various things I've found it can be difficult to get advice on purely a subset of the overall picture.

[Martin at NixonWilliams]

Come on Martin, tell him to speak to an accountant.. You know you want to!

Why get an accountant when you can get free advice on here? Just kidding.. OP - I would suggest appointing an accountant (one who understands the contractor market), there is a lot of advice out there in addition to the above that can make the whole process easier and more tax efficient for you.

[northernladuk]

Agreed - The best approach is often to make personal contributions up to the amount of salary paid and any further contributions through the company.

With many jumping from paying a salary of £7,696 to £10,000 from April, this makes the above approach that bit more efficient.

Come on Martin, tell him to speak to an accountant.. You know you want to!

[Martin at NixonWilliams]

Beyond that level of contribution - on the income stated with divis making up the balance - it is likely that corporate contributions are appropriate. Personal contributions wouldn't attract relief above 100% of salary.

Agreed - The best approach is often to make personal contributions up to the amount of salary paid and any further contributions through the company.

With many jumping from paying a salary of £7,696 to £10,000 from April, this makes the above approach that bit more efficient.

[ASB]

In most cases it is better to pay into a pension personally up to the value of your salary and the remainder as company contributions.

For example, if you are a higher rate taxpayer paying a salary of £10,000 and the remainder as dividends the two key advantages of contributing personally would be:

- Many refer to the tax relief on contributions made by higher rate taxpayers as being 40%. This is only correct if your salary income is the reason for you being a higher rate taxpayer. If you are paying a small salary and the remainder as dividends, the higher rate tax relief is effectively a further 22.5% on top of the 20% relief gained at source, therefore 42.5% in total.

- Additionally, if you declare a dividend from the company for say, £8,000, and use this money to make a contribution then your basic rate band will be extended by £10,000. However, you will only have used £8,888 of the extra £10,000 allowance created by the pension contribution and could therefore extract a further dividend of £1112 (£1000 net) from the company tax free as a result.

Quite, the mantra of "company is best" can be an over simplification.

Given the limited information provided by the OP, and assuming they have a 10k personal allowance then:-

If they pay this 10k into a personal pension (or some of it) this will gain automatic credit of 20% thus resulting in a payment to the pension provider of 12,500. They will also get CT relief on it.

Thus on this "slice" of income for 10k gross corporate income they could end up with 12.5k in pension contributions.

Beyond that level of contribution - on the income stated with divis making up the balance - it is likely that corporate contributions are appropriate. Personal contributions wouldn't attract relief above 100% of salary.

It is not worth paying extra salary to make contributions due to the ni implication of this (even though ERs credit may apply there is still EEs to consider).

I don't really understand the reason for 13360 salary - though just seems arguably a bit wasteful of EE's NI. Though if the circumstances are such that there is a larger than normal tax code that could justify it.

From the description given of "still no tax to pay" it seems as though the OP may think they are corporate contributions, surely there would be tax to pay since it is just income (it's part of taxable income and as he has noted NI applies) - even though it is being handed over to the pension company. [They reclaim which makes the net effect zero of course].

[Martin at NixonWilliams]

If you had an accountant he would probably talk to you about the significant differences between personal pension payment and company ones and the advantages of the latter...

HTH...

In most cases it is better to pay into a pension personally up to the value of your salary and the remainder as company contributions.

For example, if you are a higher rate taxpayer paying a salary of £10,000 and the remainder as dividends the two key advantages of contributing personally would be:

- Many refer to the tax relief on contributions made by higher rate taxpayers as being 40%. This is only correct if your salary income is the reason for you being a higher rate taxpayer. If you are paying a small salary and the remainder as dividends, the higher rate tax relief is effectively a further 22.5% on top of the 20% relief gained at source, therefore 42.5% in total.

- Additionally, if you declare a dividend from the company for say, £8,000, and use this money to make a contribution then your basic rate band will be extended by £10,000. However, you will only have used £8,888 of the extra £10,000 allowance created by the pension contribution and could therefore extract a further dividend of £1112 (£1000 net) from the company tax free as a result.

[Fred Bloggs]

If you had an accountant he would probably talk to you about the significant differences between personal pension payment and company ones and the advantages of the latter...

HTH...

Indeed.

[malvolio]

Thanks will take a look



I have a direct debit from the MyCo's bank account to my pension provider for a set amount each month, I account for this by adding the amount to my gross wage so as not to pay Corp Tax on this amount, however I am lead to believe that this does incur National Insurance (subject to the above which I will take a look at)

If you had an accountant he would probably talk to you about the significant differences between personal pension payment and company ones and the advantages of the latter...

HTH...