Pension Contributions - Ltd Company or Personal?

MX5huggy

How to get money into your pension most tax efficiently is not “advice”. 

Would your accountant advise you to get an electric car as a company car or would they only tell you the effect on your tax position if you asked them? 

There are 2 types of accountants those that see their role as an extension of the HMRC, making sure all tax is paid and the other that works for you minimising your tax liability. You need the latter sort. 

gillpaterson1

Marcon said:

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?

I am a tax payer but surely if I'm paying an employee pension contribution through PAYE the pension contribution is deducted by the employer before tax is deducted not after so I wouldn't pay tax on it. Plus the government then gives a top up which I wouldn't get if the limited company made the pension payment as an employer contribution.

gillpaterson1

MX5huggy said:

How to get money into your pension most tax efficiently is not “advice”. 

Would your accountant advise you to get an electric car as a company car or would they only tell you the effect on your tax position if you asked them? 

There are 2 types of accountants those that see their role as an extension of the HMRC, making sure all tax is paid and the other that works for you minimising your tax liability. You need the latter sort. 

Agree, we were with a really good firm of Accountants, unfortunatley they got taken over by a bigger company and the service is nowhere near the same. Our Accountant left and I've since had two more as people leave. I do need to find a new one but my husband and business partner died recently and they are handling the redistribution of shares and several other things that are connected so at the moment I can't really change.

Lowtrawler

As a personal contribution, you would be taxed through PAYE on the extra income and when you make the personal contribution, the pension company will reclaim the tax and add it to your contribution. You will incur personal National Insurance on the additional salary, even if you are able to avoid any additional employer National Insurance.

Simplified example, if you pay £4k into a pension from Taxed Income:

You will need £5k of taxed Income (less 20% tax) = £4k.
You will pay employee NIC on the £5k at 12%  = £600
On paying £4k into the pension, you will get £5k added once tax relief is claimed by the pension company
Overall, you take home £600 less due to the extra NIC
The company gets 19% CT relief on the extra £5k salary = £950
Net impact between you and the company is a £350 tax saving

If you pay in through the company:

The company pays in £5k
The company gets 19% CT relief = £950
Net impact is £950 tax saving

gillpaterson1

Lowtrawler said:

As a personal contribution, you would be taxed through PAYE on the extra income and when you make the personal contribution, the pension company will reclaim the tax and add it to your contribution. You will incur personal National Insurance on the additional salary, even if you are able to avoid any additional employer National Insurance.

Simplified example, if you pay £4k into a pension from Taxed Income:

You will need £5k of taxed Income (less 20% tax) = £4k.
You will pay employee NIC on the £5k at 12%  = £600
On paying £4k into the pension, you will get £5k added once tax relief is claimed by the pension company
Overall, you take home £600 less due to the extra NIC
The company gets 19% CT relief on the extra £5k salary = £950
Net impact between you and the company is a £350 tax saving

If you pay in through the company:

The company pays in £5k
The company gets 19% CT relief = £950
Net impact is £950 tax saving

Thank you so much - that makes complete sense now. It's what we have been doing but I was concerned we weren't doing it in the best way. I do appreciate you taking the time to put the example together.

Marcon

gillpaterson1 said:

Marcon said:

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?

I am a tax payer but surely if I'm paying an employee pension contribution through PAYE the pension contribution is deducted by the employer before tax is deducted not after so I wouldn't pay tax on it. Plus the government then gives a top up which I wouldn't get if the limited company made the pension payment as an employer contribution.

Ah - that's where your confusion is arising. If your pension contribution is deducted from gross pay, the pension provider can't claim a government 'top up'. You've already had the tax relief because you weren't taxed on the amount in the first place. Confusingly, this is known as the 'net pay' method!

Highly unlikely that's the arrangement you are in, so your personal pension contribution is paid out of net pay (after tax, aka as relief at source) and the provider claims basic rate tax on your behalf and adds it to the pot. This applies even to non-taxpayers, who can make a maximum personal contribution of £3,600 per annum - they pay £2,880 and the provider claims £720 in basic rate relief.

gillpaterson1

Marcon said:

gillpaterson1 said:

Marcon said:

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?

I am a tax payer but surely if I'm paying an employee pension contribution through PAYE the pension contribution is deducted by the employer before tax is deducted not after so I wouldn't pay tax on it. Plus the government then gives a top up which I wouldn't get if the limited company made the pension payment as an employer contribution.

Ah - that's where your confusion is arising. If your pension contribution is deducted from gross pay, the pension provider can't claim a government 'top up'. You've already had the tax relief because you weren't taxed on the amount in the first place. Confusingly, this is known as the 'net pay' method!

Highly unlikely that's the arrangement you are in, so your personal pension contribution is paid out of net pay (after tax, aka as relief at source) and the provider claims basic rate tax on your behalf and adds it to the pot. This applies even to non-taxpayers, who can make a maximum personal contribution of £3,600 per annum - they pay £2,880 and the provider claims £720 in basic rate relief.

Yes, that is where the confusion was. Lowtrawler kindly did an example of figures and it then all made sense! Thanks for your input and help.

dunstonh

gillpaterson1 said:

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.

Why wouldnt you draw dividends?    
£797pm equates to the primary threshold.  So, that makes sense for salary.     However, above that, taking dividends would normally be more tax efficient. (although some will go to the personal allowance and draw dividends above that).

You say you are a taxpayer, which means your draw is above the personal allowance.  So, dividends would be more cost effective.

The others have cleared the issue you had up as you shouldn't consider tax relief a top up.   Lots of people get confused when they turn tax relief into a top up.

gillpaterson1

dunstonh said:

gillpaterson1 said:

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.

Why wouldnt you draw dividends?    
£797pm equates to the primary threshold.  So, that makes sense for salary.     However, above that, taking dividends would normally be more tax efficient. (although some will go to the personal allowance and draw dividends above that).

You say you are a taxpayer, which means your draw is above the personal allowance.  So, dividends would be more cost effective.

The others have cleared the issue you had up as you shouldn't consider tax relief a top up.   Lots of people get confused when they turn tax relief into a top up.

Thanks - I do draw dividends as the main part of my salary. I have a small £800 a month salary via PAYE pay to ustilise my tax allowance.