Working out my pension contributions

BULLNOTBEAR

earnings to me mean NRE

TH1878

BULLNOTBEAR wrote: »

earnings to me mean NRE

Fair enough, but it's not actually correct as his dividends are from his employment as well. I know what you were getting at because your figures were spot on but thought it was best to clarify it because of the confusion at the start of the thread.

relaxtwotribes

BULLNOTBEAR wrote: »

You will therefore be able to make a contribution of £1,900 (gross) meaning a £1,520 net (actual contribution you will pay).

Thank you very much for your reply, BULLNOTBEAR, and thanks also to TH1878 who made the same reply. It's is very helpful and to the point.

relaxtwotribes

DD5 wrote: »

I assume you're running a limited company, hence why your income is mainly made up from dividends?
/QUOTE]

Thank you for your reply. Yes, that is the case.

relaxtwotribes

TH1878 wrote: »

You're right about his maximum personal tax relievable contribution. However, HMRC state that if an employee seems to have a comparatively low salary but a high level of employer’s pension contributions, then it must be proved that this is not as a result of National Insurance liability planning.

Thank you for your reply. On this point, yes, I do make employer pension contributions and I know it is a grey area as to what level HMRC accepts (in reply number 8 above DDH says "within reason"). I was under the impression that a general rule is that wages (in my case £5,500) plus employer pension contributions in aggregate (i.e. total remuneration) must be reasonable when looking at the work conducted for the company.
To date, I have not had the level of employer pension contributions challenged by the HMRC.
This is a different matter from the original question, but if anyone has any further input to make, then it might be useful to other readers.

BULLNOTBEAR

Becasue his salary is within the personal allowance but overall income is higher rate so OP benefits from 40% tax relief.

If he doesn't make the 100% of Earnings (NRE) contribution to a pension then he misses out on the 40% tax relief and pays additional tax on his dividends.

Also, if he doesn't make the personal pension contributions up to 100% of earnings (NRE) then there is a case for not having the salary at all but then HMRC may have something to say about that. Best to have some salary than not have all dividends and employer contributions as your 'payment' for the work being done for the limited company.

It sounds like he is doing the right thing to me!

relaxtwotribes

I am not sure that I agree with your "red" comments, DDH. There is no 1% (or even any) NI because the salary is only £5,500 per annum. This figure is above the Lower Earnings Limit so qualifies for state pension.

Also, I was under the (possibly mistaken) impression that the personal allowance is only available against earned, and not unearned, income. Clarity welcomed here.

On the matter of the £5,500 salary, the company receives 21% tax relief on that amount, just as it would if it made a pension contribution of £5,500. I pay £4,400 to the pension company, which adds £1,100 and I claim a further 20% relief on my tax return. Surely that is preferable?