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Pensions for thickies!
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loucyp
Posts: 12 Forumite
Hi everyone,
Well I am in the process of setting up a pension and am finding it all very confusing. I hope someone can help. Just to clarify my situation:
I am self-employed with my own ltd company. I would like to start a pension and went to see a financial advisor at Scottish Widows. It was suggested to me that I take out a Stakeholder pension. I was told that I would be able to make contributions equalling my salary, which is £15K. He also said that on top of this the government would add money equalling my current tax level, which would be 20%. Consequently a £15K investment would be £18K.
Here are my questions:
1. I spoke to my accountant about this. He said that he had never heard of this idea that the government 'adds' money to the pension. Who is correct, the IFA or the accountant?
2. My accountant asked who would be paying the pension, me or my company? I did not know. He seemed to think that there was little difference - the only one he could think of was that if it was paid by me (eg I took £15K salary + another £15K as salary to pay into the pension) then I would have to pay the extra NI. So my question:
Is it better to pay the pension from the business or from my personal account? Is there any difference? Which is better?
Many thanks
Lou
Well I am in the process of setting up a pension and am finding it all very confusing. I hope someone can help. Just to clarify my situation:
I am self-employed with my own ltd company. I would like to start a pension and went to see a financial advisor at Scottish Widows. It was suggested to me that I take out a Stakeholder pension. I was told that I would be able to make contributions equalling my salary, which is £15K. He also said that on top of this the government would add money equalling my current tax level, which would be 20%. Consequently a £15K investment would be £18K.
Here are my questions:
1. I spoke to my accountant about this. He said that he had never heard of this idea that the government 'adds' money to the pension. Who is correct, the IFA or the accountant?
2. My accountant asked who would be paying the pension, me or my company? I did not know. He seemed to think that there was little difference - the only one he could think of was that if it was paid by me (eg I took £15K salary + another £15K as salary to pay into the pension) then I would have to pay the extra NI. So my question:
Is it better to pay the pension from the business or from my personal account? Is there any difference? Which is better?
Many thanks
Lou
0
Comments
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The IFA, though I'm unsure about his figures, or possibly your interpretation of them:1. I spoke to my accountant about this. He said that he had never heard of this idea that the government 'adds' money to the pension. Who is correct, the IFA or the accountant?
The maximum contributions limit, I believe is based on gross contributions, not net, making you able to contribute £12K, with the 20% rebate taking it up to £15K.I was told that I would be able to make contributions equalling my salary, which is £15K. He also said that on top of this the government would add money equalling my current tax level, which would be 20%. Consequently a £15K investment would be £18K.
I've no idea on your 2nd question however.Conjugating the verb 'to be":
-o I am humble -o You are attention seeking -o She is Nadine Dorries0 -
Hi everyone,
Well I am in the process of setting up a pension and am finding it all very confusing. I hope someone can help. Just to clarify my situation:
I am self-employed with my own ltd company. I would like to start a pension and went to see a financial advisor at Scottish Widows. It was suggested to me that I take out a Stakeholder pension. I was told that I would be able to make contributions equalling my salary, which is £15K. He also said that on top of this the government would add money equalling my current tax level, which would be 20%. Consequently a £15K investment would be £18K.
Here are my questions:
1. I spoke to my accountant about this. He said that he had never heard of this idea that the government 'adds' money to the pension. Who is correct, the IFA or the accountant?
2. My accountant asked who would be paying the pension, me or my company? I did not know. He seemed to think that there was little difference - the only one he could think of was that if it was paid by me (eg I took £15K salary + another £15K as salary to pay into the pension) then I would have to pay the extra NI. So my question:
Is it better to pay the pension from the business or from my personal account? Is there any difference? Which is better?
Many thanks
Lou
Firstly, you are not self-employed, you are employed by your Ltd. company, and also are a Company Director (which is slightly different).
The financial adviser is NOT an IFA, he is paid to push Scottish Widows products, hence anything but independent.
Your accountant is essentially correct, in that the government are not actually giving you money, you are merely getting the tax back that you have already paid.
That said, the FA's advice is very poor, because he is advocating that you pay your entire salary into the pension. This of course leaves you with no regular income to live off, and you are forced to live off dividends (which generally should be paid only once a year), but with £15k of salary 'wasted', being paid out of the company, with unnecessary NI paid, you can only claim about £22k of dividends before going into the higher rate bracket.
In general, I am curious as to why you are taking a £15k salary. Compared with taking a salary of the personal allowance (about £5.2k), you are paying both Employer's and Employee's National Insurance, amounting to almost 20% on nearly £10,000. Generally speaking this is £2,000 that you are paying probably for no reason. Directors are exempt from the minimum wage, and unless you have IR35 concerns or other reasons to be nervous of HMRC, then you should arrange your affairs to pay zero NI (note you will still get NI stamp even though you don't pay any NI).
The company should certainly pay into your pension, you should not pay it yourself. This is for the following reasons:
* Small companies corporation tax now higher than income tax (going to 22% CT vs. 20% IT), so better for the company to avoid tax than yourself
* Income over Personal Allowance is subject to Employer's and Employee's NI. You do not need to pay this.
* There is no limit (well there is, but it is over £200k/year) on company pension payments. You can quite legitimately pay yourself £5k salary and £100k pension (providing gross profits are high enough to fund it).
* Payments from the company do not reduce your spendable income. In other words, if the company pays say £30k into a pension, from its pre-tax profit of £100k. This payment is not subject to CT, NI, or IT. You can still pay yourself a salary of say £5k, and then you will be subject to CT @21% (currently) on the balance (£65k), which you can pay out as a dividend (although you will pay 40% tax (25% effective) over the higher rate band of income). In simple terms, you can get ~ £35k a year from the company by paying only (and potentially same to your wife if she is a shareholder) CT (paid by the company) on the £30k, PLUS an unlimited (up to your company profits) pension payment on top, which is not taxed at all.
If you really want to, having set your salary to ~£5.2k, you can still make a NET personal contribution of your salary (net of basic rate tax = £4,160), and the government WILL give you free money, by grossing up your payment (at 20%, which is the basic rate), even though you have not paid any tax on that payment.
That said, this is a somewhat illusory gift, given that the company will be paying tax on its profits of 21%, so unless your company makes zero profits (either because it is not particularly profitable, or because your pension payment is so large), you would save MORE (21% vs 20%) tax by making the payment from the company. Cash that has been taken out of the company is quite valuable, compared to cash IN the company, bearing in mind that in addition to the 21% CT, you will have a higher rate income tax liability if you are drawing enough income to go over ~£40k. So that £5.2k in your hand could be worth even more, if you would have to pay 40% tax to get that money out.
So in conclusion, make all your payments from your company.
You have not stated y our age, the prospects for your company, its annual profits, or your retirement goals. These would affect the appropriate annual payment. Suffice to say, it is unlikely that £15k is the correct figure to be paying.
I am not sure whether the charging on stakeholder pensions is all that transparent or easy to compare, though I daresay dunstonh will turn up in due course to say that they are much cheaper than SIPPs; nonetheless, my Ltd. makes my pension payments into a Hargreaves Lansdown SIPP, and I am happy with this, as I am not tied to advisors with opaque charging schemes and unclear commission arrangements, and I have total freedom to manage things as I choose, it is not controlled by some third party who hides everything away.
You can get an INDEPENDENT advisor to assist on your investment choices, and on rebalancing, if you invest in a SIPP. You could get the money into the SIPP almost immediately, given especially the potential proximity of financial year end (if you are April-March), and defer making the investment decisions. If you are coming up to year end, putting the money in out of company funds saves you paying any tax on that payment, which is always a pleasing feeling.
Certainly in any case you would steer very well clear of Scottish Widows when it comes to investing your money, even if you do end up in a stakeholder, as people seem to come by here wailing about how rubbish their investments have been on a weekly basis.0 -
Firstly, you are not self-employed, you are employed by your Ltd. company, and also are a Company Director (which is slightly different).
The financial adviser is NOT an IFA, he is paid to push Scottish Widows products, hence anything but independent.
Your accountant is essentially correct, in that the government are not actually giving you money, you are merely getting the tax back that you have already paid.
That said, the FA's advice is very poor, because he is advocating that you pay your entire salary into the pension. This of course leaves you with no regular income to live off, and you are forced to live off dividends (which generally should be paid only once a year), but with £15k of salary 'wasted', being paid out of the company, with unnecessary NI paid, you can only claim about £22k of dividends before going into the higher rate bracket.
In general, I am curious as to why you are taking a £15k salary. Compared with taking a salary of the personal allowance (about £5.2k), you are paying both Employer's and Employee's National Insurance, amounting to almost 20% on nearly £10,000. Generally speaking this is £2,000 that you are paying probably for no reason. Directors are exempt from the minimum wage, and unless you have IR35 concerns or other reasons to be nervous of HMRC, then you should arrange your affairs to pay zero NI (note you will still get NI stamp even though you don't pay any NI).
The company should certainly pay into your pension, you should not pay it yourself. This is for the following reasons:
* Small companies corporation tax now higher than income tax (going to 22% CT vs. 20% IT), so better for the company to avoid tax than yourself
* Income over Personal Allowance is subject to Employer's and Employee's NI. You do not need to pay this.
* There is no limit (well there is, but it is over £200k/year) on company pension payments. You can quite legitimately pay yourself £5k salary and £100k pension (providing gross profits are high enough to fund it).
* Payments from the company do not reduce your spendable income. In other words, if the company pays say £30k into a pension, from its pre-tax profit of £100k. This payment is not subject to CT, NI, or IT. You can still pay yourself a salary of say £5k, and then you will be subject to CT @21% (currently) on the balance (£65k), which you can pay out as a dividend (although you will pay 40% tax (25% effective) over the higher rate band of income). In simple terms, you can get ~ £35k a year from the company by paying only (and potentially same to your wife if she is a shareholder) CT (paid by the company) on the £30k, PLUS an unlimited (up to your company profits) pension payment on top, which is not taxed at all.
If you really want to, having set your salary to ~£5.2k, you can still make a NET personal contribution of your salary (net of basic rate tax = £4,160), and the government WILL give you free money, by grossing up your payment (at 20%, which is the basic rate), even though you have not paid any tax on that payment.
That said, this is a somewhat illusory gift, given that the company will be paying tax on its profits of 21%, so unless your company makes zero profits (either because it is not particularly profitable, or because your pension payment is so large), you would save MORE (21% vs 20%) tax by making the payment from the company. Cash that has been taken out of the company is quite valuable, compared to cash IN the company, bearing in mind that in addition to the 21% CT, you will have a higher rate income tax liability if you are drawing enough income to go over ~£40k. So that £5.2k in your hand could be worth even more, if you would have to pay 40% tax to get that money out.
So in conclusion, make all your payments from your company.
You have not stated y our age, the prospects for your company, its annual profits, or your retirement goals. These would affect the appropriate annual payment. Suffice to say, it is unlikely that £15k is the correct figure to be paying.
I am not sure whether the charging on stakeholder pensions is all that transparent or easy to compare, though I daresay dunstonh will turn up in due course to say that they are much cheaper than SIPPs; nonetheless, my Ltd. makes my pension payments into a Hargreaves Lansdown SIPP, and I am happy with this, as I am not tied to advisors with opaque charging schemes and unclear commission arrangements, and I have total freedom to manage things as I choose, it is not controlled by some third party who hides everything away.
You can get an INDEPENDENT advisor to assist on your investment choices, and on rebalancing, if you invest in a SIPP. You could get the money into the SIPP almost immediately, given especially the potential proximity of financial year end (if you are April-March), and defer making the investment decisions. If you are coming up to year end, putting the money in out of company funds saves you paying any tax on that payment, which is always a pleasing feeling.
Certainly in any case you would steer very well clear of Scottish Widows when it comes to investing your money, even if you do end up in a stakeholder, as people seem to come by here wailing about how rubbish their investments have been on a weekly basis.
Was about to post when this appeared so no need - everything I was going to post has been said very well.
ps would get a new accountant as well0 -
.
* There is no limit (well there is, but it is over £200k/year) on company pension payments. You can quite legitimately pay yourself £5k salary and £100k pension (providing gross profits are high enough to fund it).
I posed a similar question to my accountants, this is what he said .....
EMAIL 1
The pension issue, unfortunately, is not as black and white. On my understanding of the issues, you would be allowed to take a £6,000 salary with a £54,000 pension. However, I am fairly certain that HMRC would try to fight it. This would likely be on the grounds that the pension expense is not ' wholly and exclusively for the purpose of the trade'. Their argument being that it is purely to increase the wealth of the director / owner. As this is a 'grey area', you would have grounds upon which to base a defence but we cannot be certain as to where the final decision would lie.
Alternatively, you would be able to take a £60,000 salary, as you suggest, and contribute £54,000 of this to your pension. This would achieve your wish of reducing both your personal and corporation tax bills to nil. However, you should be aware that you would have to pay tax and NIC on your salary throughout the year. The tax could then be reclaimed upon submission of your Self Assesment Tax Return at the end of the year but, unfortunately, the NIC would not be reclaimable. The company would also incur employers NIC which, again, would not be reclaimable.
If you intend to follow this route, there are two main issues that need to be considered. The first is that in order for the pension contributions to be deducted as an allowable expense, they must be part of an approved pension scheme. Is there such a scheme in place? The other issue to consider is that you will effectively be living on a £6,000 a year salary. This is also true of the first scenario and, while there is nothing wrong with this, the revenue are almost certainly going to ask how you can live off this amount and an enquiry is likely to follow. Do you have any other sources of income?
EMAIL 2
Of the various options you have mentioned, I would recommend taking the £36k salary / £24k pension if you feel this is acceptable. I cannot see the revenue contesting this in anyway. However, as your main goal is to maximise pension contributions and you have ample means to live on for the next two years, i think the £60k salary / 90% pension route is also a viable option. You seem to have a firm grasp on the relative pros and cons of each of these so it basically comes down to personal preference.
With regards to our other clients, you are the first I have dealt with that is aiming to maximise pension contributions in this way and so I have no basis for comparison in that respect. Almost all of our clients take a small salary ( usually £6,000) with the rest in dividends to minimise their overall tax liability. From what you have said, you seem to be outside of the scope of IR35 and, therefore, if the other options do not appeal to you, I would suggest that you would have no problems in taking the dividend route.
EMAIL 3
Again, due to the fact that this is a 'grey area' I cannot say with absolute certainty that the would accept the £30k or £36k salary route without asking any questions. However, I can say that I think that this would be perfectly acceptable according to my interpretation of the rules and that I believe it is unlikely to be questioned by HMRC. Should you be unlucky and they decide to contest it on any grounds, I am also confident that we have strong grounds for justification and would ultimately be successful. As you quite rightly point out, HMRC would not really be losing out due to the NI contributions and for this reason alone I would suggest that you should not have any problems. With all of this taken into account, I would say that the £30k salary, £18k pension is fully relievable against corporation tax in the month each expense is paid and am happy to advise you to put this into practice.
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Hi everyone,
Well I am in the process of setting up a pension and am finding it all very confusing. I hope someone can help. Just to clarify my situation:
I am self-employed with my own ltd company. I would like to start a pension and went to see a financial advisor at Scottish Widows. It was suggested to me that I take out a Stakeholder pension. I was told that I would be able to make contributions equalling my salary, which is £15K. He also said that on top of this the government would add money equalling my current tax level, which would be 20%. Consequently a £15K investment would be £18K.
Here are my questions:
1. I spoke to my accountant about this. He said that he had never heard of this idea that the government 'adds' money to the pension. Who is correct, the IFA or the accountant?
If you are paying employee contributions net, then the IFA is right and the HMRC will add a tax rebate on top.
If you (ie your company) are paying employer contributions, then the accountant is right and the HMRC will NOT add a tax rebate on top. However the pension contrinbution is relievable against corporatioin tax so reduces the tax paid by the company.0 -
Its amazing how many people seeing tied agents believe that they are really seeing an IFA.
though I daresay dunstonh will turn up in due course to say that they are much cheaper than SIPPs;
WHen using investment funds they are. As can be the case with personal pensions.
Given the low knowledge of the op, I dont think that a SIPP would be the best option for them. You have to balance the potential rewards of almost unlimited investment options with the potential damage that can be done if the investments are chosen badly. We have seen it many times on here where someone has picked the HL MM funds as their fund option and is getting worse performance and higher charges than a stakeholder or personal pension internal fund.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
ffacoffipawb wrote: »I posed a similar question to my accountants, this is what he said .....
EMAIL 1
The pension issue, unfortunately, is not as black and white. On my understanding of the issues, you would be allowed to take a £6,000 salary with a £54,000 pension. However, I am fairly certain that HMRC would try to fight it. This would likely be on the grounds that the pension expense is not ' wholly and exclusively for the purpose of the trade'. Their argument being that it is purely to increase the wealth of the director / owner. As this is a 'grey area', you would have grounds upon which to base a defence but we cannot be certain as to where the final decision would lie.
I tend to disagree with this (in a purely unqualified capacity).
The 'wholly and exclusively' test means that the total package should be effectively market rate.
Thus if you have your wife on the books to do secretarial duties (of course this is a means of extracting an extra few £k tax-free), and you pay her an £80k pension, that is not for the purposes of the trade, because she does not contribute to the business in a meaningful sense, and the £85k total package is not a fair rate for the job.
On the other hand, the OP describes himself as 'self-employed', in other words the profits of the company are entirely thanks to his abilities. It would therefore be hard to argue that his package is not for the purposes of the trade.
Have a look at
http://www.pcg.org.uk/cms/index.php?option=content&task=view&id=2202
http://www.contractormoney.com/article_contractorpensions.shtmlAlternatively, you would be able to take a £60,000 salary, as you suggest, and contribute £54,000 of this to your pension. This would achieve your wish of reducing both your personal and corporation tax bills to nil. However, you should be aware that you would have to pay tax and NIC on your salary throughout the year. The tax could then be reclaimed upon submission of your Self Assesment Tax Return at the end of the year but, unfortunately, the NIC would not be reclaimable. The company would also incur employers NIC which, again, would not be reclaimable.
As I see it, the risk is that the CT return will be questioned by HMRC, and they will say that the payment is non-allowable. This is a very small risk.
If this happened, you would have to pay CT on the pension payment. The cost of this, however, is virtually identical to the combined NI cost. But given that NI is certain and the pension payment being questioned is remote, I would go for the small risk of paying 21%, rather than the 100% risk of paying 23.8% (combined NI).If you intend to follow this route, there are two main issues that need to be considered. The first is that in order for the pension contributions to be deducted as an allowable expense, they must be part of an approved pension scheme. Is there such a scheme in place? The other issue to consider is that you will effectively be living on a £6,000 a year salary. This is also true of the first scenario and, while there is nothing wrong with this, the revenue are almost certainly going to ask how you can live off this amount and an enquiry is likely to follow. Do you have any other sources of income?
You can pay yourself £6k/year and still claim ~£30k of dividends (indeed you should), with no additional tax liability.EMAIL 2
Of the various options you have mentioned, I would recommend taking the £36k salary / £24k pension if you feel this is acceptable. I cannot see the revenue contesting this in anyway. However, as your main goal is to maximise pension contributions and you have ample means to live on for the next two years, i think the £60k salary / 90% pension route is also a viable option. You seem to have a firm grasp on the relative pros and cons of each of these so it basically comes down to personal preference.
With regards to our other clients, you are the first I have dealt with that is aiming to maximise pension contributions in this way and so I have no basis for comparison in that respect. Almost all of our clients take a small salary ( usually £6,000) with the rest in dividends to minimise their overall tax liability. From what you have said, you seem to be outside of the scope of IR35 and, therefore, if the other options do not appeal to you, I would suggest that you would have no problems in taking the dividend route.
I would tend to agree on the salary front, although £6k is somewhat unnecessary, just pay the PA.
My next question to my accountant would be that you feel that the pension payment IS wholly and exclusively for the purposes of the trade, but in the accountant's experience, what is the chance of it being queried. I would suggest that it is small.EMAIL 3
Again, due to the fact that this is a 'grey area' I cannot say with absolute certainty that the would accept the £30k or £36k salary route without asking any questions. However, I can say that I think that this would be perfectly acceptable according to my interpretation of the rules and that I believe it is unlikely to be questioned by HMRC. Should you be unlucky and they decide to contest it on any grounds, I am also confident that we have strong grounds for justification and would ultimately be successful. As you quite rightly point out, HMRC would not really be losing out due to the NI contributions and for this reason alone I would suggest that you should not have any problems. With all of this taken into account, I would say that the £30k salary, £18k pension is fully relievable against corporation tax in the month each expense is paid and am happy to advise you to put this into practice.
I think this is unnecessarily cautious. HMRC have many much bigger fish to fry, and someone who is, IMO, foolish, enough to pay a £36k salary, is way, way, way off their radar.
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I think this is unnecessarily cautious. HMRC have many much bigger fish to fry, and someone who is, IMO, foolish, enough to pay a £36k salary, is way, way, way off their radar.
It probably is, but I think that what I do may fall under the remit of IR35, despite so called clauses in my contract (substitution etc), so to pay a reasonable salary instead of a silly low one may be more sensible. I have been at the same place of work since June last year and the contract may well be renewed for a third 6 months in May. If it goes to 2 years I believe I will fall under IR35 then, even if I get away with it now.0 -
ffacoffipawb wrote: »It probably is, but I think that what I do may fall under the remit of IR35, despite so called clauses in my contract, so to pay a sensible salary instead of a silly low one may be more sensible.
Essentially you are paying additional tax as insurance against that risk.
IMO you would be better advised buying ACTUAL IR35 investigation and tax insurance, and stop giving all that money to the government unncessarily.
My own view is that the risk is quite small, and is little different in nature from the risk of being hit by a bus and being unable to work, in the sense that both are risks, and both would have negative financial consequences, but I do not insure against either.0 -
Essentially you are paying additional tax as insurance against that risk.
IMO you would be better advised buying ACTUAL IR35 investigation and tax insurance, and stop giving all that money to the government unncessarily.
My own view is that the risk is quite small, and is little different in nature from the risk of being hit by a bus and being unable to work, in the sense that both are risks, and both would have negative financial consequences, but I do not insure against either.
All the pension contributions appear to be allowable against the IR35 deemed payment even if they aren't allowable against CT.0
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