Pension Contributions - Ltd Company or Personal?

gillpaterson1

I have a small limited company. Is it more tax efficient if I increase my PAYE salary and pay personal tax contributions myself or pay them as an employer contribution from the limited company directly into the pension?

My understanding is that a salary payment from the comany to me reduces the company corporation tax liability, as would a pension contribution directly from the company to my pension however if it's paid to me in salary and I make the pension contribution, in addition, I would also personally get tax relief on the payment I make into the pension scheme on top of the company tax releif for the salary paid. Therefore, this seems like the most tax effective way but I'm not sure if I'm missing anything.

I appreciatie that there are limits in terms of how much I can contribute and still get tax releif but assuming I stay within these limits.

Would appreicate any thoughts on this.....?

Many thanks.

Grumpy_chap

Company pension contributions are the most tax-efficient as these avoid corporation tax, NI, income tax.

In addition, company contributions are not capped by annual salary.  The annual cap of £40k applies but you may be able to use unused allowance from previous years.

gillpaterson1

Thanks Grumpy_chap - would you agree that it's better for contributions to be made by me personally by taking extra salary though?

QrizB

gillpaterson1 said:

Thanks Grumpy_chap - would you agree that it's better for contributions to be made by me personally by taking extra salary though?

That's the precise opposite of what Grumpy_chap said.

gillpaterson1

Thanks QrizB, I totally missed the top line of Grumpy_chap's reply!

Surely if I paid the pension as an employee I wouldn't pay income tax on the contribution and the company wouldn't pay corporation tax as it would would be part of my pay. I believe that the personal NI contributions would still be less than the 20% corporation tax. In additon we qualify for the small business NI employment allowance of £4K so the business wouldn't pay NI.

Am I sitll missing something??

zagfles

gillpaterson1 said:

I have a small limited company. Is it more tax efficient if I increase my PAYE salary and pay personal tax contributions myself or pay them as an employer contribution from the limited company directly into the pension?

My understanding is that a salary payment from the comany to me reduces the company corporation tax liability, as would a pension contribution directly from the company to my pension however if it's paid to me in salary and I make the pension contribution, in addition, I would also personally get tax relief on the payment I make into the pension scheme on top of the company tax releif for the salary paid. Therefore, this seems like the most tax effective way but I'm not sure if I'm missing anything.

I appreciatie that there are limits in terms of how much I can contribute and still get tax releif but assuming I stay within these limits.

Would appreicate any thoughts on this.....?

Many thanks.

Yes but usually the personal tax relief just relieves tax you personally pay! The exception is if you make contributions that take you below the personal allowance. So it's usually worth paying yourself a salary at least up to the personal allowance.

dunstonh

Surely if I paid the pension as an employee I wouldn't pay income tax on the contribution and the company wouldn't pay corporation tax as it would would be part of my pay.

To pay that money into the pension as a personal contribution, you would need to have drawn it out of the company.  That usually means dividends.  Dividends are not a business expense. So, to get that dividend in your hand you would paid corporation tax at the company level and dividend tax at a personal level.  That is more than personal tax relief.  Hence why employer contributions are more cost effective.   

Other reasons are the employer contributions can go higher than the salary.   You are probably only taking a salary to the primary threshold or personal allowance.  Which is the limit you can pay in personal contributions.  Whereas company contributions can go the full £40k (and use carry forward if applicable).

Thrugelmir

Do you use an accountant for your tax affairs?  If so ask them. There's the minimum wage potentially to be considered as well. 

gillpaterson1

I wouldn't draw it as dividends I would take that part in addition to my PAYE salary. I only take £800 a month as PAYE but could add to that in order to put into a pension. That would still use my personal tax allowance. Any additional contributions could be made by the company.

gillpaterson1

Thrugelmir said:

Do you use an accountant for your tax affairs?  If so ask them. There's the minimum wage potentially to be considered as well. 

Yes I do use an accountant - I will ask them but they aren't allowed to give advice. Perhaps I could ask them for a comparison rather than advice....

Marcon

gillpaterson1 said:

Thrugelmir said:

Do you use an accountant for your tax affairs?  If so ask them. There's the minimum wage potentially to be considered as well. 

Yes I do use an accountant - I will ask them but they aren't allowed to give advice. Perhaps I could ask them for a comparison rather than advice....

They can give information, though - and that's all you need.

dunstonh said:

Surely if I paid the pension as an employee I wouldn't pay income tax on the contribution and the company wouldn't pay corporation tax as it would would be part of my pay.

To pay that money into the pension as a personal contribution, you would need to have drawn it out of the company.  That usually means dividends.  Dividends are not a business expense. So, to get that dividend in your hand you would paid corporation tax at the company level and dividend tax at a personal level.  That is more than personal tax relief.  Hence why employer contributions are more cost effective.   

Other reasons are the employer contributions can go higher than the salary.   You are probably only taking a salary to the primary threshold or personal allowance.  Which is the limit you can pay in personal contributions.  Whereas company contributions can go the full £40k (and use carry forward if applicable).

For clarity, dividends are not classed as earned income for the purposes of assessing the maximum personal contribution you can make to a pension, so you can't use them as the basis for personal contributions. 

gillpaterson1 said:

Thanks QrizB, I totally missed the top line of Grumpy_chap's reply!

Surely if I paid the pension as an employee I wouldn't pay income tax on the contribution and the company wouldn't pay corporation tax as it would would be part of my pay. I believe that the personal NI contributions would still be less than the 20% corporation tax. In additon we qualify for the small business NI employment allowance of £4K so the business wouldn't pay NI.

Am I sitll missing something??

Your (personal) contributions to a pension would be paid out of taxed income, assuming you are a taxpayer - are you?