Limited company director - pensions

dw123323

Hello fellow MSEs,

I am hoping someone can please give me some advice, as I am really struggling to understand the information already online and find the matter very confusing. I am looking to start making pensions contributions. I have an accountant at present, but have found them extremely confusing and giving mixed advice (I will therefore change soon).

I am the sole director of 2 separate limited companies, and from both take the typical combination of low salary and dividends just up to the higher rate threshold (ie total income of £50,000 for this tax year). I don't have other sources of income.

How specifically can I decide whether I am better to make a company contribution into my SIPP pension account, or whether to make a personal contribution from my own personal savings? Is it best to use solely one of these options, or both in conjunction?

Also, I am not sure how to determine whether I am eligible for only the basic state pension or full state pension - how would I be able to confirm whether I have made the right NI contributions for this?

A thid option I am considering is whether to invest my own personal savings into a LISA or Stocks & Shares ISA and then simply use this as a 'pension fund' and plan not to touch the money at all until retirement. Is this a sensible idea?

Thank you very much in advance, and apologies for a common question being re-asked.

xylophone

For information
https://www.drewberryinsurance.co.uk/pensions-advice/company-directors-pension-contributions

https://www.hl.co.uk/free-guides/self-employed-pension-guide?SQ_DESIGN_NAME=ppc&theSource=PCGSY&Override=1&adg=G+SIPP+SEPG+B&gclid=EAIaIQobChMI7Y6auPHJ5wIVSrTtCh3QqwYVEAAYAyAAEgIGFvD_BwE

https://www.moneyadviceservice.org.uk/en/articles/pensions-for-the-self-employed

xylophone

State pension forecast
https://www.gov.uk/check-state-pension
And a book which might be worth reading
DIY Pensions A Simple Guide to Pensions, SIPPS and Retirement Planning   by John Edwards

Albermarle

We often see on this forum , self employed people/Small company directors  getting poor financial/pensions advice from their accountants . It seems wrong to assume that even a good accountant, is by default a competent personal financial advisor ( although some might be of course )
Normally a pension has a 6.25% tax advantage over a S&S ISA, assuming you get 20% tax relief on the way in and you will be a 20% taxpayer when you take the income . The disadvantage is that the pension can not be touched until you are at least 55.
For both pensions and S &S Isa's it is important that you are invested in the right sort of funds within them . 

SonOf

I have an accountant at present, but have found them extremely confusing and giving mixed advice (I will therefore change soon).
Accountants are not there to give pension advice.  Most wouldn't know that much about pensions.

How specifically can I decide whether I am better to make a company contribution into my SIPP pension account, or whether to make a personal contribution from my own personal savings? Is it best to use solely one of these options, or both in conjunction?
Nearly always it is best paid from company as you get money out of the company without paying NI or tax and the company saves on corporation tax.

Also, I am not sure how to determine whether I am eligible for only the basic state pension or full state pension - how would I be able to confirm whether I have made the right NI contributions for this?
There is no basic state pension any more unless you are already in receipt of the state pension prior to the changes.
You can fill in form BR19 and post it or you can apply for a state pension forecast online using the Government Gateway.  Online is more detailed as it breaks the tax years down.
A thid option I am considering is whether to invest my own personal savings into a LISA or Stocks & Shares ISA and then simply use this as a 'pension fund' and plan not to touch the money at all until retirement. Is this a sensible idea?
Have you weighed this up against taking less income (and paying less tax) and then put more into the pension via the company
Pension beats ISA.   With LISA it will be closer depending on your tax position (now and future).

dw123323

Thanks xylophone for the links and book recommendation.

Thanks also SonOf for you responses. I've completed the BR19 following your advice. I will also prioritise putting my own personal funds into the LISA instead of a normal S&S ISA if I do decide to do this.

dw123323

Albermarle said:

We often see on this forum , self employed people/Small company directors  getting poor financial/pensions advice from their accountants . It seems wrong to assume that even a good accountant, is by default a competent personal financial advisor ( although some might be of course )
Normally a pension has a 6.25% tax advantage over a S&S ISA, assuming you get 20% tax relief on the way in and you will be a 20% taxpayer when you take the income . The disadvantage is that the pension can not be touched until you are at least 55.
For both pensions and S &S Isa's it is important that you are invested in the right sort of funds within them . 

May I please ask where you get the 6.25% figure from?

eskbanker

dw123323 said:

Albermarle said:

We often see on this forum , self employed people/Small company directors  getting poor financial/pensions advice from their accountants . It seems wrong to assume that even a good accountant, is by default a competent personal financial advisor ( although some might be of course )
Normally a pension has a 6.25% tax advantage over a S&S ISA, assuming you get 20% tax relief on the way in and you will be a 20% taxpayer when you take the income . The disadvantage is that the pension can not be touched until you are at least 55.
For both pensions and S &S Isa's it is important that you are invested in the right sort of funds within them . 

May I please ask where you get the 6.25% figure from?

Put £100 (of already-taxed money) into an ISA, it's still £100 when you take it out (ignoring growth).
The same £100 into a pension is grossed up to £125, but when taking it out, 25% is tax-free, so you pay tax of 75% x 20% x £125 = £18.75, leaving you with £106.25.

Albermarle

May I please ask where you get the 6.25% figure from?

If you put £80 of after basic rate  tax income into a pension you get tax relief of £20 added = £100

When you take it out you get 25% tax free and the rest taxed at 20% = £85 

If you put £80 in an ISA , you can take out £80 with no tax . 

£5 /£80 = 6.25% gain

Prism

Also if you contribute to a pension directly from your limited company you don't pay any NI (either employers or employees)

KCartwright

From the first link xylophone posted above:

"Other factors HMRC will examine before allowing pension contributions via your limited company include:

• Checking that pension contributions don’t exceed the company’s annual profits. So, if your company turns a profit of £20,000 in a tax year, £20,000 will likely be the maximum the company can contribute to your pension that year."

Is that right? If the company has a profit of 30K in the current financial year, however has retained profit of 100K from previous years, does it mean the company contribution can be maximum 30K or can it be 130K (assuming carry forward AA from previous years is available)? 

• "Making sure you’re making similar pension contributions to others in your company who are doing work of similar value. For example, you may be one of two directors who each put in 50% of the hours and effort required to drive a company and so you should each be rewarded with similar pension contributions in any given tax year to pass HMRC’s test."

If the spouse is a non fee earner, however is a secretary with 40% share holding, does she receive proportionate employer pension contributions to the director (fee earner)?