Legality of Pension Contribution

totallyskint_3

I wonder if anyone can give me guidance in this.

I am a Director of a Limited Company. This is not a husband and wife thing, there are other directors and around 15 other employees.

My Salary is 6K PA.

My Dividends are £28,800 PA.

Its bonus time and I have 25K that I can take any way I want.

I want this to be paid into a SIPP from the company.

Can this be done even though the total amount going into the SIPP will be 5 X my PAYE earnings. I appreciate this will go in gross and no further tax relief will be available.

Also as part of an onging process I am able to have the company make a monthly contribution of 1K per month plus 12.8% of this as 'saved' employer NI contributions.

So I could have in one year contributions of 25K + (12 * 1000 * 1.128) = 38,536 when my salary is only 6K.

I was also thinking of paying the net of the 6K salary figure in also. Its not that I dont need every penny but I want to put some money away while I can.

Does the Inland Revenue allow this sort of thing?

My salary is low because the accountant sorts it this way, the company pays increased corporation tax but the directors pay very little personal tax, there I think is an overall benifit in terms of total tax paid.

Many thanks.

dunstonh

Can this be done even though the total amount going into the SIPP will be 5 X my PAYE earnings. I appreciate this will go in gross and no further tax relief will be available.

Upto 100% of your income or £215,000 (whichever is lower) can go into a pension each year and get tax relief. There is no limit on how much can go in above that allowance but you need to consider lifetime allowances and how/if it would impact on those in the long term.

In your case, you will only get tax relief on the first 6k with the rest getting none. No real benefit at all for doing more unless you are planning a commerical property purchase within the SIPP or are terminally ill and trying to reduce your IHT liability.

I was at a seminar recently and it was noted that a number of accountants have recommened an increase in salary where pension contributions are involved as it can now work out more efficient to have a higher salary than it did in the past. Some examples were given which confirmed what they were saying.

So, unless you increase your income, I dont see what you are going to gain by contributing to a pension.

totallyskint_3

Thank you for the comments. It sounds like I can do it.

If I were to take the 25K as a bonus I would only get 22163 (25K less employers NI) and becuase I will go into the 40% tax bracket (6K salary + 29 PA divs) take off 1% employees NI I will get in my hand little over 13K. Thats a tax rate of over 48%!!!

I am already fully contributed to this years ISA so their is no shelter for it. I dont particularly like putting money into a pension but I did some qucik calcs and the 25% tax free I can get my hands on will almost be worth what the 13K would grow to plus I would have the 75% left to draw down on. Is my logic flawed?

One other thing the 1K per month would be salary sacrifice, if I were to take this as salary I woild again be taxed at 48%. The deal clincher for me is that I can boost the fund by saved NI (employers and employees), the latter paying for the SIPP admin charges. The former compensating NI saving for the crap performance of pensions. Although with a SIPP and choosing funds wisely I hope to do better, I have a Skandia PP and Sun Life and the people responsible for these need ####ing shooting.

dunstonh

Although with a SIPP and choosing funds wisely I hope to do better, I have a Skandia PP and Sun Life and the people responsible for these need ####ing shooting.

Skandia's pension is good quality and almost SIPP like. It may not be the cheapest option anymore and with fund supermarket pensions, hybrid SIPPs and full SIPPs, it may not have the biggest fund range like it used to (still over 300) but its certainly not a bad option. As little as two years ago, that was the pension to have. Sun Life is naff though.

I am already fully contributed to this years ISA so their is no shelter for it. I dont particularly like putting money into a pension but I did some qucik calcs and the 25% tax free I can get my hands on will almost be worth what the 13K would grow to plus I would have the 75% left to draw down on. Is my logic flawed?

Only time will tell Another option is perhaps to use unit trusts and defer the decision to contribute to the pension to a later date. It depends on where you see your income going in the future.

Dont forget spouse/partner either if applicable.