Pension / Ltd Company Income tax efficiency quandary

snootleboop

Excellent point by Grumpy_chap regarding speaking to your accountant – whatever anyone on here says, your accountant will be best placed to advise.

With regards to levels of pension contributions, you are mostly correct in that personal pension contributions are limited to earnings (for the purposes of obtaining tax relief), whereas employer contributions are not limited by an employee’s salary. So, no need to dig out that paddle…

An employee earning £10k would only be allowed to make a £10k gross (£8k net) personal contribution, but their employer would be allowed to make larger contributions.

The £40k referred to is the standard Annual Allowance (can be tapered down to £4k through sufficiently high earnings or increased through use of carry forward). The AA looks at all contributions from all sources. In the case of the employee above, their employer could make a maximum £40k contribution (ignoring taper and carry forward) if there are no other contributions being made. However, if the employee made their maximum £10k gross contribution, the employer’s maximum contribution would be correspondingly reduced to £30k.

This is a topic which is commonly misunderstood and there are numerous explanations on this forum which outline how it all works in a better way than me.

Jeremy535897

scdandem said:

Grumpy_chap said:

Pennywise said:

the gross pension contribution is limited to the wage, so the OP can't reduce the wage beyond the gross pension contribution, 

snootleboop said:

fair point about personal contributions being limited to salary, 

I thought pension contributions of up to £40k were normally permitted even if that exceeds salary.
I may be incorrect.

This one confuses me too. As I understand it, you're limited to £40k or 100% of your earnings when making Personal pension contributions but there's no limit when it's an Employers contribution? That's the basis I've been working on for years so I hope I'm right or I'm going to be up the creek! 

Employee contributions are limited to relevant earnings, but employer contributions are not, but see caveat on deductibility here:
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pension-contributions-qa/

scdandem

Grumpy_chap said:

OP - do you have an Accountant?  They arebest placed to advice you on this.  If yo do not have and Accountant, then it would be very sensible to get one.

Others have commented on the various tax options and balance between CT / IT / NI / Pension.  I won't add anything, other than asking whether you have other earned income on which NI is paid?  If not, paying below the NI threshold may be sacrificing certain state entitlements, in particular state pension.

What particularly strikes me from your post is that everything is written in the first person, yet the earnings from the company are shared between three recipients.
"I don't actually need all the salary + dividends..."
"I just take..."
"...thought I should"
"...my future pension"
"...I'd like to keep my pension contribution as it is..."

Unless the split share ownership is a sham, the other shareholders may have something to say about the reduction in business income being managed to result in a reduction of dividend payout but maintaining (or increasing) the employee pension at the same time.  Why has the business income reduced?  If it is because the employee approaching retirement is working fewer hours, then why would the business owners support the salary level being maintained?

You don't say how old your daughter is.  If she is young, then her being a shareholder may be very questionable.  If she is older (which I assume is probable given you state your intention to start drawing the pension in less than two years), then her having this dividend income may impact her entitlement to any other benefits, or may give rise to a tax liabilty elsewhere (for example if she has an employee share scheme that pays dividend that would otherwise be within the zero percent dividend allowance).

Irrespective, the dividends paid to your wife and to your daughter should be paid to your wife and to your daughter for them to then do whatever they wish with the funds.  The dividends paid to others cannot simply be treated as your own.

Full circle to my first comment that your Accountant is the best placed to advise, with benefits and pitfalls all properly considered.

Whoa there! You certainly are a Grumpy_chap, although I could think of a few much better descriptions based on your wild assumptions.

My business has been perfectly well run for the last 16 years, above board, very profitably and with the full support of my family, whom I might add very much enjoy spending their own tax free dividends.

And the last time I looked, I had a very healthy, fully paid up, State Pension to look forward to, as I choose to take the optimum directors salary, above the lower and below the secondary earnings limit. You can find details on Google.

And I'm a woman...

scdandem

snootleboop said:

With regards to levels of pension contributions, you are mostly correct in that personal pension contributions are limited to earnings (for the purposes of obtaining tax relief), whereas employer contributions are not limited by an employee’s salary. So, no need to dig out that paddle…

An employee earning £10k would only be allowed to make a £10k gross (£8k net) personal contribution, but their employer would be allowed to make larger contributions.

The £40k referred to is the standard Annual Allowance (can be tapered down to £4k through sufficiently high earnings or increased through use of carry forward). The AA looks at all contributions from all sources. In the case of the employee above, their employer could make a maximum £40k contribution (ignoring taper and carry forward) if there are no other contributions being made. However, if the employee made their maximum £10k gross contribution, the employer’s maximum contribution would be correspondingly reduced to £30k.

This is a topic which is commonly misunderstood and there are numerous explanations on this forum which outline how it all works in a better way than me.

Thanks for this. So am I right in thinking that my limited company can only pay a maximum of £40k into my pension for CT relief purposes and anything above that doesn't receive relief?

That's actually about where I'm at. Each year I roughly pay around £40k into my pension, mostly as employer contributions and occasionally as a personal contribution within the allowances. I'd like to keep up this level of contribution but I have purposefully reduced the business workload (and therefore income) which means I now need to either reduce the salary, the tax free dividends or the pension. 

But this has thrown up another point. I don't think I'm using all my personal allowance! I transfer part of my tax allowance to my husband under the Marriage Allowance rules but that leaves £2670 of my allowance unused. Mmm... something else to explore.

My reluctance to speak to an accountant is several fold. I'm a (long ago) qualified bookkeeper and also currently employ an excellent bookkeeper within my business. We're clearly not tax experts but it's not a huge business so we've always managed without. And to be honest, enquiries have suggested that the cost of getting accountant advice would far outweigh any gains I may or may not make! So here I am trying to figure it out for myself...

Jeremy535897

The link I provided earlier explains (my bold italics):

Q: Is a client's Annual Allowance limited to their relevant earnings? 

A: No. Relevant earnings are used to work out the maximum personal tax relief. The Annual Allowance rules are not related to, or restricted by, the relevant earnings figure. 

Say a client earns £25,000 in this tax year. He still has the standard Annual Allowance of £40,000 (assuming neither Tapered Annual Allowance nor Money Purchase Annual Allowance apply). 
He is unlikely to use all of his AA as he will only receive tax relief on a personal contribution up to £25,000 gross, which he pays. This is the first time he joins a registered pension scheme (RPS). 

If in the following tax year he earns £55,000, he could pay a contribution of £55,000 gross and receive tax relief. For the AA test, he'd fully use that year's allowance of £40,000 and he can carry forward the unused AA of £15,000 from the previous year (NB no earlier carry forward as he was not a member of RPS before that) so there is no AA excess in this instance. The term ‘carry forward’ relates to unused annual allowance and is only required where total pension inputs in the tax year exceed the standard (or tapered) annual allowance.

Remember that any employer contributions also count towards an individual’s annual allowance limit. If there was also an employer contribution in this example, this would cause an AA excess for the member, and the member would need to report and pay the AA charge.

Q: My client takes a salary of £16,500 from the Ltd company he owns. Is he restricted to paying himself an employer pension contribution which does not exceed his relevant earnings i.e. £16,500?

A: There is no link between employer pension contribution amounts and an employee's relevant earnings. An employer can make a pension contribution of any amount. However, corporation tax relief will be subject to satisfying the wholly and exclusively rule and the full amount of the contribution will be tested against the member's available annual allowance. Where the member has insufficient Annual Allowance (including any carry forward), then an Annual Allowance excess exists and the corresponding tax charge must be reported by the employee through self-assessment. 

The employee is responsible for paying any Annual Allowance excess tax charge. In certain circumstances they may be able to ask their pension scheme to pay the charge on their behalf (by reducing their pension benefits/ fund), however, they must still report this through self-assessment.