Using Pension contributions to offset upper income tax?

Judwin

The most you can pay into a personal pension in any tax year is the greater of either :
1) Your total relevant UK earnings, up to a maximum of £40K.
2) £3600


Do you pay yourself any salary? Say up to the £8060 National Insurance limit? If you do, then you can contribute that amount. If not (i.e. you only pay yourself dividends) then you are limited to £3600 gross (£2880 nett).


The 80% comes from the way personal pensions and SIPPs reclaim the tax. They only ever reclaim basic rate tax - so 20%. You have to reclaim the other 20% from the tax man - usually via your self assessment tax return. So to pay 8060 gross into a pension you write a cheque out for £6558 (£8060* 0.8). The pension company will reclaim 20% tax (£1612), which grossing this back up to £8060. You then tell HMRC on your tax return, and they will refund you another £1612 at year end.


Cheers
Judwin

[Deleted User]

Judwin wrote: »

The most you can pay into a personal pension in any tax year is the greater of either :
1) Your total relevant UK earnings, up to a maximum of £40K.
2) £3200


Do you pay yourself any salary? Say up to the £8060 National Insurance limit? If you do, then you can contribute that amount. If not (i.e. you only pay yourself dividends) then you are limited to £3200 gross (£2880 nett).


The 80% comes from the way personal pensions and SIPPs reclaim the tax. They only ever reclaim basic rate tax - so 20%. You have to reclaim the other 20% from the tax man - usually via your self assessment tax return. So to pay 8060 gross into a pension you write a cheque out for £6558 (£8060* 0.8). The pension company will reclaim 20% tax (£1612), which grossing this back up to £8060. You then tell HMRC on your tax return, and they will refund you another £1612 at year end.


Cheers
Judwin

I believe that the 2880 grosses up to £3600 , not £3200

Judwin

[Deleted User] wrote:

I believe that the 2880 grosses up to £3600 , not £3200

You are correct - and I've now corrected the post. Sorry.

[Deleted User]

Judwin wrote: »

You are correct - and I've now corrected the post. Sorry.

No problem - but no need to apologise for a simple typo

solidpro

Thanks Judwin - could you clarify this bit:

I do pay myself a salary of £8060. Basically, just for the next two years, I am being paid £8060 basic, £54k ish in Dividends.

Basically I want to pay off my mortgage in April and move on in my life, and to do so, I'm going to pay a bit more tax in the next 2 years, which is about the same as I'd pay in Mortgage interest but feel a whole lot better about it.

If so, is it 20% or 40% of that which I can put back against my income tax?

I'm sorry but I'm no accountant - just a small businessman trying to do the best I can (not that it matters, but my company pays a huge amount of corporation tax for a one-man-band).

Darksparkle

solidpro wrote: »

Thanks Judwin - could you clarify this bit:

I do pay myself a salary of £8060. Basically, just for the next two years, I am being paid £8060 basic, £32k ish in Dividends and then another £22k in salary, which pushes me into the 40%.

Basically I want to pay off my mortgage in April and move on in my life, and to do so, I'm going to pay a bit more tax in the next 2 years, which is about the same as I'd pay in Mortgage interest but feel a whole lot better about it.

If so, is it 20% or 40% of that which I can put back against my income tax?

I'm sorry but I'm no accountant - just a small businessman trying to do the best I can (not that it matters, but my company pays a huge amount of corporation tax for a one-man-band).

You said earlier that it was all in dividends?

Now from what you are saying you have £30,060 salary and £32,000 in dividends.

solidpro

Now from what you are saying you have £30,060 salary and £32,000 in dividends.

My mistake, post corrected. It's all dividends

MDMD

Bear in mind there has been a lot of speculation that (in the worst case) all HR relief could be ditched from 15th March (budget day) or 6 April or could be seriously curtailed by him over the next couple of years. No-one really knows but it could all be in vain.

There's a thread on the pensions board:

https://forums.moneysavingexpert.com/discussion/5386421

Judwin

solidpro wrote: »

Thanks Judwin - could you clarify this bit:

I do pay myself a salary of £8060. Basically, just for the next two years, I am being paid £8060 basic, £54k ish in Dividends.

I'll try - but I'm not an accountant, there are new tax rules for 2016/17 and there is a budget in March which may or may not change things completely.


As things currently stand, you personally will be allowed to contribute £8060 gross to a pension plan. The total cost to you will be £4836 (60% of £8060). You write a cheque for £6558 (£8060* 0.8) and send it to your chosen pension provider. They then reclaim 20% tax (£1612), and at year end you fill in a tax return and HMRC reduce your tax liability by another £1612.



Your tax return will show £63K of 'income'. For 2016/17 the personal allowance is £10800 I think. You will also have a tax free dividend allowance of £5K. HMRC will extend your basic rate tax band by the gross amount of your pension payment, so this will increase from £31900 to £39960.


I therefore think the tax you will pay will be broken down as follows....


£10800 @ 0% = £0 (personal allowance)
£5000 @ 0% = 0 (dividend allowance)
£39960 @ 7.5% = £2997 (basic rate dividend tax)
£7240 @ 32.5% = £2353 (higher rate dividend tax)


So you'll pay £5350 tax in total, take home £47650, and from that have to pay £4836 into a pension plan.


I think that's right - I'm sure someone will correct it if I've misunderstood recent dividend tax changes.


Cheers
Judwin

Judwin

You should also note that your company can make payments directly into your pension plan, and that these payments are not restricted by your "relevant income". Your company does not have to pay CT on these payments.


So to get rid of your higher rate tax liability, reduce your dividend 'pay' by £7240, and get your company to pay that money directly into your pension. Your company also saves CT on this payment amounting to £1810, so you might be able to persuade the directors to pay this into your pension too.


You would still be allowed to pay in a gross £8060 yourself, and the £7240 (+£1810?) would be added making a total input of £15300 (£17110?).



Also if you're got kids there's child benefit things to consider.

Cheers
Judwin