Limited Company Profits into Pension Pot

looknohands

I am director of a company and am looking at pension options, here to understand how things work as a director with dividend payments. At 31 I am a bit late to the game as have been saving for a house and building my business.

I've approached my accountant who have given me details of an advisor, but she's unavailable until March, so wanted to get some advice on here if possible just so I don't go into this meeting clueless.

I pay myself salary, £8060 per year and then dividends up to higher rate tax threshold.
I would like to then take a further chunk of the P&L each year and put this towards my future, in pension or paying off mortgage. This year am looking to take around £30k chunk of the P&L to contribute, every year beyond this I'd look to contribute around £10k - £30k depending on how the business performs. The aim to have a pension pot of around £400k by 61, which i've heard is around £15 - £20k per year, along with business equity and mortgage paid off at 59 this seems like a comfortable amount.

I'm wondering how best I get this money from the business into my pension pot and at what cost? Can this only be taken through PAYE, which will then incur a lot of Employers NI, Tax and NI etc? Or can the company pay it direct as a lump sum? (Noob questions I know). I know employer matching the pension is a big thing now but does this help me as the profits are 100% mine?

As providers I have heard of Nest and Smart Pension, the advisor will recommend some, but if anyone has any thoughts on what is best for this situation let me know.

Also as a sub-question I assume paying into the pension is better than paying off mortgage?
With over-paying the mortgage I would need to take this as a dividend taxed at both ends with corp tax and higher dividend rate, also i have heard paying off a mortgage at a low interest vs pension is a no no (my rate is 2.75% until Jan 2018), but we do have a very high LTV (82%) so by overpaying we can get under 75% by Jan 2018 and then get a better deal when remortgaging.

Thanks for any help in advance, pensions baffle me!

TheTracker

Pension contributions are, like salary, pre-tax expenses. Contributions are not taken from profits. There is no NI on the contributions and usually not a PAYE issue. The company can contribute up to £40k pa regardless of your salary. There need not be any cost to the company. You as an individual set up a SIPP and the company makes a bank transfer. As an individual you may pay fees for the SIPP.

Pensions needn't baffle you. They are merely tax wrappers. You pay no tax now and you may avoid tax now and in return you take risk on what the tax regime is when you begin to drawdown and restrict yourself to drawdown until 65-67 or whatever the government of the day tells you the age is. What you hold within the wrapper may be considered virtually identical to investments you may hold in an ISA or u wrapped portfolio. Don't mix the two issues.

looknohands

So a pension contribution would not even be liable to corporation tax? Let alone income tax and NI? And this is just paid through the company, it doesn't need to go through PAYE?

That is also perhaps the clearest explanation i have read, thank you.

TheTracker

looknohands wrote: »

So a pension contribution would not even be liable to corporation tax? Let alone income tax and NI? And this is just paid through the company, it doesn't need to go through PAYE?

That is correct. Now you see why companies offer generous "matching" contributions, as its cheaper to them to do so than the employee making no contribution. They don't do it out of the goodness of their corporate hearts. Consult your accountant on whether to report it on PAYE RTI, I've heard both yes and no (I do not, and have not had any problems).

It sounds like a good deal. But you shouldn't compare other with sal/div alternatives. Compare it with leaving the profits in the company until you retire. In that case, under today's rules, you'll pay 20% CT and likely 10% CGT on the remainder totalling 28%, though these percentages will change as laws do. And When you draw it under pension a good chunk may be at 20%, so the relief isn't as attractive as at first blush.

LHW99

If payments into the pension come from the company they reduce the amount of corporation tax ir pays.

looknohands

Ok well that's a pleasant surprise to me that there's no tax at all. Makes paying off the mortgage idea seem a bit silly now.. unless interest rates went ridiculously high? But then would that also effect interest earned by pension investments thus cancelling out the benefit?

Do you receive the state pension alongside the pot investment, if I retired at 61 with the pot would I then get an additional £6k per year at 68?

Are things like Nest and Smart Pension appropriate for directors paying in lump sums? or are there better alternatives?

xylophone

Does the company have any employees?

Otherwise, some form of personal pension? This could be a SIPP.

http://www.hl.co.uk/pensions/sipp/how-much-can-i-invest/employer-contributions

TheTracker

looknohands wrote: »

Ok well that's a pleasant surprise to me that there's no tax at all. Makes paying off the mortgage idea seem a bit silly now.. unless interest rates went ridiculously high? But then would that also effect interest earned by pension investments thus cancelling out the benefit?

Are things like Nest and Smart Pension appropriate for directors paying in lump sums? or are there better alternatives?

Schemes like Nest are being brought in to reduce the friction of employees beginning to contribute to a pension. If you have employees you'll need to get on that path for them, and you'll have been receiving plenty of literature about them from HMRC as a company owner.

But if you're the only employee and a director then they are largely irrelevant to your original questions. They offer no benefits over simply opening a personal pension like a SIPP. You can compare costs of SIPPs by looking at Monevator's comparison table and/or MSE forum's very own Snowman's spreadsheet.

Get some cash in a SIPP before April. You can then work through options for investments separately, using an advisor if you wish.

looknohands

No employees yet, we just use contractors and suppliers, will however be taking on staff this year, my staging date is November 2017 as the company was only set up recently but was a Sole Trader business for the past 5 years. So am getting advice from FA on this and my personal pension.

TheTracker

looknohands wrote: »

No employees yet, we just use contractors and suppliers, will however be taking on staff this year, my staging date is November 2017 as the company was only set up recently but was a Sole Trader business for the past 5 years. So am getting advice from FA on this and my personal pension.

Be careful to understand and disambiguate the information you seek and receive from an accountant (largely company based) and FA (largely personal based). Don't pay for the same information twice. Most limited company accountants will talk through the sort of stuff in this thread free of additional charge especially if you've been with them a while. There is no advice here, just explanation of tax and pension law and their efficient exploitation.

looknohands

Thanks the SIPP sounds very interesting. I've had a search and can see a lot of discussions and am aware there's a risk, are there any good / stickied threads on SIPP's, investment discussions? It would be interesting to read how people invest to minimise risk. Thanks everyone for the information it's been very helpful.