SIPP Funding best option

rogerFFF

Hi,

I am thinking of opening a SIPP and I have a question about the most tax efficient way of funding it.

I would want to make regular, say monthly contributions.

Here is my situation:

1-      I am the director of my UK Ltd company but do not draw any salary or dividends from it.

2-      I am as well self employed with income that puts me squarely in the 40% tax bracket

 My self-employment income affords me and my family a comfortable lifestyle and I could contribute to a SIPP, but it won’t be much, and I would like to do more but in the most tax efficient way.

I thought of 2 ways of going about this:

1-      My Ltd company could contribute to my personal SIPP (as an employer). It would have enough money to do so. Let’s say for example, 10 K/year.

The Ltd. would not pay the corp. tax on those 10 K.

 2-      I thought what if the Ltd. company pays me the 10 K as a salary. It would not affect my tax bracket as I am already above the 40% threshold.

The Ltd would not pay tax as it’s a 10 K salary, probably a bit of NIC…

Now personally I would take the 10 K and contribute them to my SIPP. Would I be eligible for the extra tax relief since I am in the 40% bracket? In which case that is much more beneficial in terms of tax efficiency.

Just to clarify, my aim here would be to fund the SIPP and in the same time draw money from the company without me needing the proceeds to live off and get a 40% boost to my SIPP from day one…

would the second way be more tax beneficial to me or am I missing something?

Thank you in advance for your help.

Roger

cloud_dog

I am by no means particularly experienced in this area but, why are you not paying yourself the minimum salary to ensure NI contributions, then paying yourself (director) in dividends, and making company payments in to your personal pension?

I thought this is the best financial option for a self employed/ director of a Ltd Co.?  Hasn't your accountant offered this guidance, or is there some benefit I am not aware of in doing it the way you describe?

WindInHerHair

Cloud_dog is right, a director of a Ltd Co. normally pays themselves a monthly minimum salary (up to the Personal Allowance limit for the year).
The way I understand it, if you go for option 1. you would receive £2000 Corporation tax relief (@20%) on a £10K contribution from your company (employer) to the SIPP.
If you go for option 2, your company would pay you the monthly salary (personal income) which, when invested into your pension, would then attract the 40% tax relief. It looks like option 2 is the most tax efficient, but you would need your accountant to set up payroll for the monthly salary from your Ltd Co and include these amounts in your personal tax return. Maybe check it all through with your accountant.

rogerFFF

cloud_dog said:

I am by no means particularly experienced in this area but, why are you not paying yourself the minimum salary to ensure NI contributions, then paying yourself (director) in dividends, and making company payments in to your personal pension?

I thought this is the best financial option for a self employed/ director of a Ltd Co.?  Hasn't your accountant offered this guidance, or is there some benefit I am not aware of in doing it the way you describe?

For thr time being I am avoiding director salary and dividends  (as director of the Ltd) because the income from my self employment puts me already in the 40% bracket and I do not need the extra income that the Ltd would pay me to live off.

cloud_dog

Why not pay yourself less in salary and then pay more in director dividends?

It seems counterintuitive to me but, as mentioned I am not experienced in this area and perhaps there are other considerations that are relevant that I cannot see.