Limited Company Pensions contributions

Daveinlincoln

Hi all,

I am self employed and have just set up as a Limited company under the advice of my accountant.

I read on here and elsewhere that making pension contributions from a limited company is the most tax efficient way but how is that the case?

I currently save the maximum into my SIPP (£40k a year by 12 monthly payments) i pay in £32k and Hargreaves Lansdown get the rest for me.

I spoke to HL to tell them that the future monthly contributions would be coming via my company....she then informed me that there would be no further tax relief coming in every month as the contributions are from a company and not personal.

I'm assuming my accountant would chase the tax relief,or is it just set against any tax liability.

I know i'm missing something here but what?...I'm struggling to see any advantage here.

Educate me if you can?:rotfl:

Prism

When you pay your own contributions you get back 20%, but that's after paying NI (2 types), and income tax. If you pay yourself dividends you pay corporation tax (19%) and then dividend tax (7.5%) before getting the 20% back. If you pay direct from the company (effectively an expense) you pay none of these taxes but your also don't get the 20% relief.

Also, if you only take a small salary your are limited on how much you can pay in yourself. A directors pension is only limited by the 40k max per year.

There is not much in it but you do end up with a slight advantage by paying your pension direct from your company.

p00hsticks

Daveinlincoln wrote: »

Hi all,
I am self employed and have just set up as a Limited company under the advice of my accountant.

Two important things you need to get your head around are;

1. you are not self-employed - you are employed by your company
2. The money in the company belongs to the company, not you.

You can get money out of the company by the company paying its employee (you) a salary - in which case you will pay income tax and employees NI, and the company pays employers NI - or paying its shareholder (presumably also you) a dividend out of any profits (the company having first paid corporation tax on the profit).

The company can also pay into a pension for you - this will be a cost to the company so means it pays less coproration tax.

Sterlingtimes

Daveinlincoln wrote: »

Hi all,

I know i'm missing something here but what?...I'm struggling to see any advantage here.

Educate me if you can?:rotfl:

I have just got all of this set-up very recently. It takes about 15 minutes on the 'phone with Hargreaves & Lansdown.

I work three days a week via my limited company.

I take an annual salary of £8,160, pay no NI (employer's or employee's). I pay £1,632 a year in income tax.

My wife takes an annual salary of £8,160 without any deduction whatsoever.

All other profit is paid gross by my company to my pension.

I, therefore, expect that I will pay no further NI, income tax, corporation tax or dividends.

I do pay income tax on my pension income.

kidmugsy

Prism wrote: »

. If you pay yourself dividends you pay corporation tax (19%) and then dividend tax (7.5%) before getting the 20% back.

If the company makes a lot of money you (OP) could find yourself paying 32.5% on some of the dividends. Then having the company contributing to the pension is a particularly attractive way to get money out of the company and into your own name.

Prism

kidmugsy wrote: »

If the company makes a lot of money you (OP) could find yourself paying 32.5% on some of the dividends. Then having the company contributing to the pension is a particularly attractive way to get money out of the company and into your own name.

High rate tax... never I tell you!

Good point. Its about a balance between keeping cash in the business to cover quiet times and getting it out into a pension. I have nearly a years full salary + dividends in mine as a cash buffer.

kidmugsy

Prism wrote: »

High rate tax... never I tell you!

Good point. Its about a balance between keeping cash in the business to cover quiet times and getting it out into a pension. I have nearly a years full salary + dividends in mine as a cash buffer.

Very wise too. A young member of my extended family is winding up his small company and getting the capital out at a favourable rate of Capital Gains Tax, but of course that money has already been subject to corporation tax.