single person limited company - should my company pay into pension?

me1000uk

Hi there.
Just wondering as I operate as a limited company doing various contracting roles but still building it up and currently on a very low income. (apologies as I don't know some of the accounting jargon)

as it's relatively early and I have some savings I am paying a low salary to avoid any extra taxes and want to deal with any excess income accumulated around the end of the year.

I have a pension on an app (penfold) that I contribute a small amount to until I can I increase my bookings. It's a personal pension which I pay from my own bank account.

I was just wondering is there a mechanism where I can bulk pay at the end of the year and does that save me on corporation tax without triggering any other NI/income tax etc whilst the business income is low at this stage. I read somewhere about employer contributions but have no real idea.

So for example I'm taking the £700 odd monthly as a salary, and say I have an extra 10k at the end of the year in the business bank account after other expenses. Is this where I can put like 5k in a pension (just transfer from company account to my personal pension account and call it an employee contribution) and take out 4k in dividends after paying the corporation tax on the remaining 5k? 

I realise it's not much of a living cost at the moment but I fortunately have funds to keep me going whilst trying to grow what I'm doing now. I imagine if it does grow I will take a higher salary and get the accountant to manage it more efficiently, but at this early stage perhaps I can save a some money in the first couple of years if I can increase pension/reduce tax. 

Appreciate any tip to point me in the right direction if it's a relatively simple thing and someone has direct experience.

Marcon

me1000uk said:

Hi there.
Just wondering as I operate as a limited company doing various contracting roles but still building it up and currently on a very low income. (apologies as I don't know some of the accounting jargon)

as it's relatively early and I have some savings I am paying a low salary to avoid any extra taxes and want to deal with any excess income accumulated around the end of the year.

I have a pension on an app (penfold) that I contribute a small amount to until I can I increase my bookings. It's a personal pension which I pay from my own bank account.

I was just wondering is there a mechanism where I can bulk pay at the end of the year and does that save me on corporation tax without triggering any other NI/income tax etc whilst the business income is low at this stage. I read somewhere about employer contributions but have no real idea.

So for example I'm taking the £700 odd monthly as a salary, and say I have an extra 10k at the end of the year in the business bank account after other expenses. Is this where I can put like 5k in a pension (just transfer from company account to my personal pension account and call it an employee contribution) and take out 4k in dividends after paying the corporation tax on the remaining 5k? 

I realise it's not much of a living cost at the moment but I fortunately have funds to keep me going whilst trying to grow what I'm doing now. I imagine if it does grow I will take a higher salary and get the accountant to manage it more efficiently, but at this early stage perhaps I can save a some money in the first couple of years if I can increase pension/reduce tax. 

Appreciate any tip to point me in the right direction if it's a relatively simple thing and someone has direct experience.

If you transfer funds to your personal account, it's either a dividend or salary - with potential tax implications (and NI if it's salary), even if you then pay it on to your pension. Why not pay straight to a pension as a company contribution? If your current pension doesn't accept employer contributions, that's probably a good reason to start a SIPP or similar which will accept them.

Personal contributions are limited to your earnings for the year, whereas company contributions can be higher than earnings, so that's a point worth considering.

You'll get full corporation tax relief on your company pension contributions and they won't trigger either an NI or an income tax liability for you.

dunstonh

single person limited company - should my company pay into pension?

Its the most tax efficient way and the normal way for "own" limited companies.

I have a pension on an app (penfold) that I contribute a small amount to until I can I increase my bookings. It's a personal pension which I pay from my own bank account.

That is not the best way.  Its costing you.

So for example I'm taking the £700 odd monthly as a salary, and say I have an extra 10k at the end of the year in the business bank account after other expenses. Is this where I can put like 5k in a pension (just transfer from company account to my personal pension account and call it an employee contribution) and take out 4k in dividends after paying the corporation tax on the remaining 5k? 

You pay from the company account either using direct debit or cheque, bank transfer or whatever by making an employer contribution.    The pension contribution is a business expensive and that gets you corporation tax relief.

You must not pay from the company and class it as a personal contribution.  Remember that the company contribution is gross and you get tax relief through a reduction in your corporation tax.      Whereas personal contributions get relief at source.   So, make sure you do not inadvertently lower your contribution (by going from net to gross but keeping the monthly direct debit amount the same)

edit 11.39am - corrected typo

xylophone

https://getpenfold.com/pension-guides/how-much-can-a-company-contribute-to-a-directors-pension

tony4147

Upon to a couple of years ago I contracted for 30 yrs with my own ltd company and had my company pay into my pension, it's the most tax efficient way of paying in.

Grumpy_chap

dunstonh said:

You pay from the company account either using direct debit or cheque, bank transfer or whatever by making an employee contribution.    The pension contribution is a business expensive and that gets you corporation tax relief.

You must not pay from the company and class it it as a personal contribution.  Remember that the company contribution is gross and you get tax relief through a reduction in your corporation tax.      Whereas personal contributions get relief at source.   So, make sure you do not inadvertently lower your contribution (by going from net to gross but keeping the monthly direct debit amount the same)

That should read employer I would have thought.

dunstonh

Grumpy_chap said:

dunstonh said:

You pay from the company account either using direct debit or cheque, bank transfer or whatever by making an employee contribution.    The pension contribution is a business expensive and that gets you corporation tax relief.

You must not pay from the company and class it it as a personal contribution.  Remember that the company contribution is gross and you get tax relief through a reduction in your corporation tax.      Whereas personal contributions get relief at source.   So, make sure you do not inadvertently lower your contribution (by going from net to gross but keeping the monthly direct debit amount the same)

That should read employer I would have thought.

yep - some typos can change the whole context!

me1000uk

That's great thanks everyone for the response.
So just to clarify, is it ok to wait until towards the end of the tax year and put a bulk payment from company to pension or does it have to be a fixed regular amount?

I think all the other questions have been answered. Many thanks

xylophone

So just to clarify, is it ok to wait until towards the end of the tax year and put a bulk payment from company to pension or does it have to be a fixed regular amount?

From link in my post above.

Director pensions at Penfold

With a Penfold pension, paying in through your limited company takes just 5 minutes. You can set up regular payments, or make one-off payments through bank transfer, Direct Debit or instant payments, all via the app in just one tap.

Albermarle

me1000uk said:

That's great thanks everyone for the response.
So just to clarify, is it ok to wait until towards the end of the tax year and put a bulk payment from company to pension or does it have to be a fixed regular amount?

I think all the other questions have been answered. Many thanks

Do not forget, as many do, that how your pension is invested is also important.

Grumpy_chap

me1000uk said:

So just to clarify, is it ok to wait until towards the end of the tax year and put a bulk payment from company to pension or does it have to be a fixed regular amount?

Yes, a bulk payment will be fine, or you can make regular payments, or a mix.  The choice is yours.
Assuming that the pension scheme does not have rules that restrict this flexibility.

The payments must be direct from the company account to the pension fund and must be declared as employer contributions. 

The annual allowance (and any available carry forward) will apply, but not the cap relative to earned income.