Pension or Mortgage

slbs2009

Good evening,

I am really struggling at the moment if to pay off the mortgage or contribute towards a pension.

I am 32 years old, got my own business that is doing very well.

Mortgage left is £108k which I have available in a stocks & shares ISA.

I am a 40% tax payer but don’t currently have a pension.

Any advice is welcomed.

Brynsam

You could do both from the sound of it - although don't forget to ensure you have a good solid rainy day fund just in case...

If you pay into a pension, you can get 40% tax relief, provided you paid 40% tax in the first place on the whole of your pension contribution, assuming it is a personal contribution. If your business is set up as a limited company and you are a PAYE employee, the business could make a contribution to your pension and you wouldn't be liable for income tax, the business could claim corporation tax relief and no NI is payable.

slbs2009

Thank you very much for your advice.

The company is a limited company and I am on the PAYE.

I will discuss your advice with the accountant.

Thanks again.

SonOf

The company is a limited company and I am on the PAYE.

Pension trumps both S&S ISA and paying off the mortgage in financial terms.

Pension contributions are a business expense. So, you reduce your corporation tax bill. It also avoids dividend tax.

The only reason for doing mortgage overpayments is if you are stretched and need to reduce the balance quicker whilst interest rates are low.

kinger101

Definitely pension. I addition to being much more tax efficient (saving income tax, national insurance and corporation tax), the return you'll get on paying off the mortgage is equivalent to the interest rate - likely well below inflation.

Thrugelmir

slbs2009 wrote: »

I am 32 years old, got my own business that is doing very well.

Life has a habit of throwing curved balls when you least expect them.

Splitting your money across the various options may not provide the best return. Though may enable you to sleep easier at night. As will build insurance against all eventualities.

steampowered

If you overpay the mortgage, you get:
- Saving the interest rate you are paying - about 2%?
- Possibly being able to remortgage at a lower LTV to bring your interest rate down.

If you invest in a pension, you get:
- Tax relief giving your money an instant uplift.
- Investment returns - the historic long term average return generated by the major stock markets is about 7-8% per year.
- Tax savings in your business.

From a purely financial point of view, the pension is the clear winner.

There can be a soft benefit to paying off the mortgage in terms of reducing immediate cash flow strains, but if you do pay off the mortgage don't let that cause you to overspend at the expense of a decent pension.

Anonymous101

slbs2009 wrote: »

Good evening,

I am really struggling at the moment if to pay off the mortgage or contribute towards a pension.

I am 32 years old, got my own business that is doing very well.

Mortgage left is £108k which I have available in a stocks & shares ISA.

I am a 40% tax payer but don’t currently have a pension.

Any advice is welcomed.

Paying 40% tax when you run your own business doesn't make any sense to me. Are you not able to control your pay to such an extent where you are not wasting (paying tax) at that level?


Your business is able to contribute to your pension at no personal cost to yourself and write the cost of that off against its tax liability so I'd recommend you take a look at doing that as soon as possible. Certainly before you start to think about over paying a mortgage.

SonOf

Paying 40% tax when you run your own business doesn't make any sense to me. Are you not able to control your pay to such an extent where you are not wasting (paying tax) at that level?

The OP probably isnt paying 40% but 32.5%. Most own company directors will be taking dividends above the primary threshold and the tax on those is 32.5%. Not 40%. He may have said 40% when he really means Higher rate tax.

If the OP is taking a salary above the primary threshold and is paying 40% then that does open up a number of other questions as to why that is the case.

atush

Pension. Which you can afford as you have 108K in a S&S isa. So dont contribute more to it for now.

Then, of course your company will pay the contributions not you. You will save NI and corp tax. pay yourself to the primary threshold, info above. so no 40% tax. Take dividends for the rest of money required.

Do a spending diary/SOA/budget and cut back on any overspending.

slbs2009

SonOf wrote: »

The OP probably isnt paying 40% but 32.5%. Most own company directors will be taking dividends above the primary threshold and the tax on those is 32.5%. Not 40%. He may have said 40% when he really means Higher rate tax.

If the OP is taking a salary above the primary threshold and is paying 40% then that does open up a number of other questions as to why that is the case.

First of all thank you for the replies. The reason I haven’t thought about a pension is because I always wanted to be mortgage free as at first it was a big sum of money that was worrying me.

I will definitely take all of your advice and look into a pension.

I do take dividends at 32.5%.

Thanks again.