Employer contributions vs. personal tax return

BettySpofkins

Are contributions made by my employer into my pension (over and above my own contributions) considered taxable income?

In other words, will they have to be reported on my next personal tax return and thereby increase the amount of my tax bill?

I can't get a straight answer from HMRC, obviously.

(If it helps, my employer is really me. I'm trying to find the most efficient way of sorting out a pension through my own Ltd Company.)

cb4fwh

No, employer contributions are not.

Personal contributions receive tax relief at 20%. Company contributions reduce your corporation tax liability which is charged at 20%

As you are working through a limited company, you are better off contributing monies as a personal contribution as it increases the amount of money that you can take out of your company as dividends or salary by the same amount.

However, my accountant will only allow me to contribute the same amount as a personal pension contribution that I pay myself in PAYE salary.

If I want to contribute more than this, it has to go as a company contribution.

At a very high level, assuming I pay myself 8k PAYE salary, I can contribute the same as a personal pension contribution.

This then increases my tax free allowance from £8105 to £16105 for the 2012-13 tax year, and therefore allows me to take £50475 dividends & salary (£34370+8105+8000) before incurring higher rate tax.

BettySpofkins

Thanks, just trying to digest all that.

So if I've got this right...if the company pays into the pension, it saves the 20% Corp Tax straight off. There's then less 'profit' left so I'm paying myself less dividends. As a higher rate dividend tax payer, I would have paid ~25% on that cash had it gone into my pocket rather than into the pension, but if the employer contributions are untaxed as you say, I'd pay 0%, making an overall tax saving of ~40%?

In which case I'm not sure I follow your recommendation to contribute personally, because surely the corporation tax would kick in?

westy22

The Employer Contribution is more cost effective than a personal contribution for a HR tax payer although both have their part to play.

Like many in a similar position, I pay myself a salary that is between £107 and £146 per week (to get NI credit without actually paying NI). I then make a personal contribution to my pension to match my PAYE earnings.

In addition, I make gross employer contributions to my pension which reduce profits and therefore reduce CT.

Then I pay dividends to take me just below the HR threshold after the personal contribution. If you pay yourself dividends above the HR threshold then the saving can be even larger.

If you use a PAYE calculator and work out the difference between paying yourself £10k as dividends or salary or paying a £10k employers pension contribution the benefit of the latter method to both the company and the employee is very clear.

westy22

However, my accountant will only allow me to contribute the same amount as a personal pension contribution that I pay myself in PAYE salary.

It is not just your accountant stopping you - these are HMRC rules.

BettySpofkins

Thanks, but I'm still puzzled - why pay any personal contributions at all, since it simply incurs CT, which can be avoided?

jamesd

There's no particular reason to pay personal contributions if you can instead choose to pay from the business. The test you'd then need is whether the pension contributions were justifiable given the scope of the services provided to the company.

For pure employees the issue with this is that it may reduce their salary for mortgage purposes but a sole trader would have to provide and be judged on accounts anyway.

cb4fwh

BettySpofkins wrote: »

So if I've got this right...if the company pays into the pension, it saves the 20% Corp Tax straight off.

You pay CT on profits. Therefore, if you have profits of e.g. £2000 per month, you will pay £400 CT on this amount. If however, you have profits of £2000 per month, but decide to make a company pension contribution of £1000, your profits are now £1000 & you will pay £200 CT.

BettySpofkins wrote: »

There's then less 'profit' left so I'm paying myself less dividends.

Correct. You need to decide that balance of what you want you want to take out of the business today versus planning for the future.

BettySpofkins wrote: »

As a higher rate dividend tax payer, I would have paid ~25% on that cash had it gone into my pocket rather than into the pension, but if the employer contributions are untaxed as you say, I'd pay 0%, making an overall tax saving of ~40%?

Essentially, you are right. You are saving CT on the employer contribution, and if you only pay yourself up to the HRT threshold, you are paying less personal tax on dividends taken out of the business. I pay myself up to the HRT threshold, and leave any excess money in the business as I can afford to do so.

BettySpofkins wrote: »

In which case I'm not sure I follow your recommendation to contribute personally, because surely the corporation tax would kick in?

Correct, however you receive tax relief on those contributions from the government. If you pay yourself upto the HRT bracket, these would be at 20% So, if you contribute £1000 per month, you would actually see £1200 in your pension as the government has added the extra £200 as an incentive to save for the future. Essentially, it levels itself out as I mentioned earlier...

cb4fwh

westy22 wrote: »

It is not just your accountant stopping you - these are HMRC rules.

Sorry, you are correct.

cb4fwh

BettySpofkins wrote: »

Thanks, but I'm still puzzled - why pay any personal contributions at all, since it simply incurs CT, which can be avoided?

If still unclear, it may be worth speaking to your accountant using exact figures. This should be their bread & butter...