Clarity on pensions tax relief for non-taxpayer

fizio · 21 September 2017 at 4:30PM

Having read many forums and websites I am not clear on the following 2 points so any help appreciated

1. Non tax payer earning 8000 can put 6400 into sipp pension and get 20% relief to get a 8000 pension pot i.e free money. Some places say this is legit and others say its max 2880 allowed so max 720 free money. Seems like a big tax loophole but may well be legit?

2. A Ltd company can elect to make an employer pension contribution for above employee for eg 5000 and this is made gross with no tax implication for employer or employee. Some websites say the total of employee+employer can't exceed total salary so its one or the other in the above case. Other websites state Ltd companies can put in the full annual allowance if they want regardless of earnings.

I suspect point 2 may need more specialist advice but thought I'd ask anyway

TheTracker · 21 September 2017 at 5:16PM

haf63 wrote: »

Having read many forums and websites I am not clear on the following 2 points so any help appreciated

1. Non tax payer earning 8000 can put 6400 into sipp pension and get 20% relief to get a 8000 pension pot i.e free money. Some places say this is legit and others say its max 2880 allowed so max 720 free money. Seems like a big tax loophole but may well be legit?

2. A Ltd company can elect to make an employer pension contribution for above employee for eg 5000 and this is made gross with no tax implication for employer or employee. Some websites say the total of employee+employer can't exceed total salary so its one or the other in the above case. Other websites state Ltd companies can put in the full annual allowance if they want regardless of earnings.

I suspect point 2 may need more specialist advice but thought I'd ask anyway

On 2-

Any employer can contribute to an employees SIPP any amount the employer and employee mutually agree. Put in 100k if you agree, it’s just anything over your annual allowance would be taxed. 5000k salary and 40000 Pension? No problem.

Linton · 21 September 2017 at 5:24PM

1. In this area it seems that practicalities may over-rule the law. Because of the way the system works you would get the full tax relief on the unpaid tax. But I don't think HMRC would be likely to pick up on the matter nor would really care. It isn't a massive loop hole as the pension would be liable to tax when withdrawn.

2. This is much clearer. Only the employee's contribution is limited by the earnings rule. It doesn't apply to the employer.

fizio · 21 September 2017 at 5:29PM

Wow that was fast and fully answered - spent a couple of hours looking into this and should have just come here!!

It does seem like a ridiculously good deal in the current climate where every tax/pension 'advantage' is being closed down by hmrc.

For me it means I can effectively get a free 20% on salary and also a free 19% on the employer contributions by saving on corporation tax.

happy days with no downside - in my circumstances - as close to pension age so can withdraw tax free 25% etc very soon

TheTracker · 21 September 2017 at 5:42PM

haf63 wrote: »

For me it means I can effectively get a free 20% on salary and also a free 19% on the employer contributions by saving on corporation tax.

happy days with no downside - in my circumstances - as close to pension age so can withdraw tax free 25% etc very soon

It’s not quite as good as that. I would compare the benefit versus doing nothing (ie leaving money in the company) vs doing something inefficient (like paying salary).

You could leave 10k in the company, be taxed 20% CT, then when you cease working pay 10% on liquidated amounts, so receive £7.2k tax free. You could access that for very early retirement.

Or you could put it in a pension. Receive 25% tax free lump sum. Then depending on your pension drawdown, be taxed probably 0-20% on it, so between £8.5k and £10k of it. So for many people maybe just a saving of about 13%.

fizio · 22 September 2017 at 8:04AM

TheTracker wrote: »

It’s not quite as good as that. I would compare the benefit versus doing nothing (ie leaving money in the company) vs doing something inefficient (like paying salary).

You could leave 10k in the company, be taxed 20% CT, then when you cease working pay 10% on liquidated amounts, so receive £7.2k tax free. You could access that for very early retirement.

Or you could put it in a pension. Receive 25% tax free lump sum. Then depending on your pension drawdown, be taxed probably 0-20% on it, so between £8.5k and £10k of it. So for many people maybe just a saving of about 13%.

I wasn't aware of the liquidation angle but my main goal is to extract money from the company and keey the company going (property company) and my understanding was that ideally i want to use pensions/salary/ etc to minimise CT and then use dividends.

Clarity on pensions tax relief for non-taxpayer

Comments

Categories

Get our FREE Weekly email full of deals & guides - and it’s spam-free