Tax efficient way to pay salary and pension from company

tdsmoore

My business partner and I are the 2 directors of our limited company and currently pay a £12,570 salary and then dividends to take us up to the 40% threshold (£50,270). Until now, we've paid separately into personal pensions.

The main reason we're looking at this now is that we'd like to pay more than our £12,570 limit into our pensions which is only possible if we pay through the company. We're also in a position where we have money in the company which we'd like to remove in a tax efficient way.

We're going to speak to a tax advisor soon but want to try and get a basic understanding.

Could anyone explain in simple terms what the most tax efficient approach would be for us to pay ourselves £60,000 of which £20,000 would be pension payments (company, personal payments, or a mix)? We'd hate to do something and find that we've not understood the ramifications personally or for the business given that the money in the business is to all intents and purposes, ours.

The different scenarios we've considered are;

1 - Paying a higher salary e.g. £20k plus dividends of £40k so we can pay £20k into a pension
2 - Paying an extra 10k dividends and accept we can't pay more than £12,570 into a pension
3 - Paying somewhere between 10k and £20k company pension then making dividend payments of between £17,700 and £27,700

Thanks so much!

Prism

Option 3 is the most tax efficient - you may even be able to pay into the same personal pension or SIPP that you already have. You will need to check that they can accept company contributions.

Your pension pensions will come out before corporation tax as an expense and you won't need to pay any dividend tax this way either. You won't get an HMRC top up, as you didn't pay tax in the first place.

Dazed_and_C0nfused

Prism said:

Option 3 is the most tax efficient - you may even be able to pay into the same personal pension or SIPP that you already have. You will need to check that they can accept company contributions.

Your pension pensions will come out before corporation tax as an expense and you won't need to pay any dividend tax this way either. You won't get an HMRC top up, as you didn't pay tax in the first place.

Paying tax in the first place isn't necessarily relevant when it comes to pension tax relief 

Plenty of people contribute and get basic rate relief under RAS despite paying no tax.

But no pension tax relief is due on employer contributions.

Prism

Dazed_and_C0nfused said:

Prism said:

Option 3 is the most tax efficient - you may even be able to pay into the same personal pension or SIPP that you already have. You will need to check that they can accept company contributions.

Your pension pensions will come out before corporation tax as an expense and you won't need to pay any dividend tax this way either. You won't get an HMRC top up, as you didn't pay tax in the first place.

Paying tax in the first place isn't necessarily relevant when it comes to pension tax relief 

Plenty of people contribute and get basic rate relief under RAS despite paying no tax.

But no pension tax relief is due on employer contributions.

Yes, thats what option 3 is - employer contributions

Grumpy_chap

tdsmoore said:

My business partner and I are the 2 directors of our limited company and currently pay a £12,570 salary and then dividends to take us up to the 40% threshold (£50,270). Until now, we've paid separately into personal pensions.

The main reason we're looking at this now is that we'd like to pay more than our £12,570 limit into our pensions which is only possible if we pay through the company. We're also in a position where we have money in the company which we'd like to remove in a tax efficient way.

We're going to speak to a tax advisor soon but want to try and get a basic understanding.

Could anyone explain in simple terms what the most tax efficient approach would be for us to pay ourselves £60,000 of which £20,000 would be pension payments (company, personal payments, or a mix)? We'd hate to do something and find that we've not understood the ramifications personally or for the business given that the money in the business is to all intents and purposes, ours.

The different scenarios we've considered are;

1 - Paying a higher salary e.g. £20k plus dividends of £40k so we can pay £20k into a pension
2 - Paying an extra 10k dividends and accept we can't pay more than £12,570 into a pension
3 - Paying somewhere between 10k and £20k company pension then making dividend payments of between £17,700 and £27,700

Thanks so much!

Pay the £20k as company pension contributions.  This is a business expense so does not suffer corporation tax, NI (employer or employer) or income tax.

Pay the £12.5k salary.  

Pay the balance of drawings as dividend.

Marcon

Prism said:

Option 3 is the most tax efficient - you may even be able to pay into the same personal pension or SIPP that you already have. You will need to check that they can accept company contributions.

Your pension pensions will come out before corporation tax as an expense and you won't need to pay any dividend tax this way either. You won't get an HMRC top up, as you didn't pay tax in the first place.

Only the first £1K of dividends is tax free, starting in the next tax year, so dividend tax will be payable on anything over that - and option 3 says the intention is to pay dividends of between £17,700 and £27,700, so there certainly will be significant tax payable.

tdsmoore

Thanks everyone, confirming my hunches but...

As a follow up to this - is there a benefit to paying the pension through the company rather than paying dividends, then making a personal contribution e.g.

1. Paying £12,570 salary, £17,700 dividends and £20,000 company pension
2. Paying £12,570 salary, £27,700 dividends and £10,000 company pension, then using £10,000 of dividends to make a personal contribution

I understand that option 1 is better for the company as it reduces corporation tax but overall for us as 50% shareholders does it actually make a difference?

dunstonh

The main reason we're looking at this now is that we'd like to pay more than our £12,570 limit into our pensions which is only possible if we pay through the company. We're also in a position where we have money in the company which we'd like to remove in a tax efficient way.

The willingness to pay more than your salary shouldn't be the driver.   You should have been doing it from the company from the off.  Company contributions are better than personal contributions.

The different scenarios we've considered are;
1 - Paying a higher salary e.g. £20k plus dividends of £40k so we can pay £20k into a pension
2 - Paying an extra 10k dividends and accept we can't pay more than £12,570 into a pension
3 - Paying somewhere between 10k and £20k company pension then making dividend payments of between £17,700 and £27,700

None of those.
4 -  Pay  a salary of £12,570, dividends on the remainder and pension contributions from the company.