Pension - Self-Employed v Ltd. Company?

Dave1001

I am a 48 year old self-employed (not IT) consultant, using a one-man Limited Company vehicle. I take a salary of £6,500 p.a. I estimated two years ago that the Ltd. Co. would minimise tax, and gain approximately another £3k p.a. onturnover. I do not currently retain profits (not that sophisticated).

Over the years I have only built up £20k in a personal pension, for reasons which no longer apply. I now intend to build the pension up as much as possible (OR – to reframe this away from emphasis on a pension – plan for a good retirement). I am assuming that the pension is my best first emphasis, due to tax breaks. I will invest annually in £7k ISAs as well, and then perhaps property and shares when I have established the foundation.

As of 6th April 2006 I believe that I can only make annual pension contributions equal to 100% of salary (i.e. £6.5k p.a.). This seems inadequate, as I intend to retire at 65, which will mean only £104k in pension contributions from the company over the next 16 years.

Would I be better advised to go close the Limited Company and go back to simply being a sole trader, so I can invest say £20k p.a. as pension contribution? I appreciate this might marginally increase my tax and NI obligations, but would not the tax breaks of a pension offset this over the longer term?

Would sole trader pension contributions be invested pre-tax?

I am not in any way subject to IR35, and I am planning for the longer-term here. You guys always think of things I never do or would never hear of! Any views out there? thanks.

Debt_Free_Chick

Dave1001 wrote:

I am assuming that the pension is my best first emphasis, due to tax breaks. I will invest annually in £7k ISAs as well, and then perhaps property and shares when I have established the foundation.

Provided you accept that the tax advantages that come with a pension plan include some conditions i.e. you can only get at the money at retirement and then you must use 75% of it to generate income (a pension). Effectively, it's "locked away".

As of 6th April 2006 I believe that I can only make annual pension contributions equal to 100% of salary (i.e. £6.5k p.a.). This seems inadequate, as I intend to retire at 65, which will mean only £104k in pension contributions from the company over the next 16 years.

But the company can make contributions up to £215,000 (under the April 2006 rules). So the knack is to have your company make contributions directly, as a normal business expense, into your pension plan. The company does not need to have any formal role in your pension plan at all - it simply puts money in to it. You will not pay tax or NI on the company's contributions.

If you want to be able to select the investments that the pension plan uses, then look at a SIPP (Self Invested Personal Pension). If you don't want to do that, then a Stakeholder pension will do the trick.

HTH

Dave1001

Thanks Debt_Free_Chick, the underlying worry that promoted my post was that I had a recent chance conversation with an IFA, and he suggested that possibly the £215,000 (or in my case, the allowance of me making tax free contributions of greater value than my £6.5k salary) would be at the taxman's discretion for people in my situation, as we were deliberately using dividends and minimising salary, and I have not been investing pension contributions for 15 years.

Does the taxman have this power, to tax, or legislate on, my intended pension contributions, on the basis of previous form and my chosen (legal) company structure?

As I type it out it sounds bizarre, but the IFA felt it would be best to wait for some test cases to have provren it is ok before proceeding. I have looked at the legislation on the net, and can't find any such discretionary concerns.