Higher tax rate - is contributing towards my pension a good idea to lower it? Ltd Director

Halabala9

Hi Everyone,

I am a one man band Ltd Director in construction. Since all my accounts are dead simple, I decided to stop using an accountant few years ago, and have been doing it myself since. No issues so far until this year.

Now this year, since it is the first time I will fall into a Higher Tax rate on my Self Assessment, I am looking for a way to lower it. I was thinking that it might be a good idea to contribute towards my pension?

If I can do this, I think the best way would be to do this via my Ltd Company, I would let’s say contribute £3000, that would lower company profit and dividend that I can pay myself, which would lower my higher tax rate on SA, as I understand I can claim it as my expense?

If what I wrote is correct, how can I contribute it? I was always paying myself the minimum salary, so have never had to pay any NI but was still getting the minimum state pension. Do I pay that £3000 to HMRC via some contribution site?

I hope what I wrote makes sense!

Regards

Mike

eskbanker

Mike997 said:

Do I pay that £3000 to HMRC via some contribution site?

No, you make an employer contribution to a pension.

Grumpy_chap

Mike997 said:

Hi Everyone,

I am a one man band Ltd Director in construction. Since all my accounts are dead simple, I decided to stop using an accountant few years ago, and have been doing it myself since. No issues so far until this year.

Now this year, since it is the first time I will fall into a Higher Tax rate on my Self Assessment, I am looking for a way to lower it. I was thinking that it might be a good idea to contribute towards my pension?

If I can do this, I think the best way would be to do this via my Ltd Company, I would let’s say contribute £3000, that would lower company profit and dividend that I can pay myself, which would lower my higher tax rate on SA, as I understand I can claim it as my expense?

If what I wrote is correct, how can I contribute it? I was always paying myself the minimum salary, so have never had to pay any NI but was still getting the minimum state pension. Do I pay that £3000 to HMRC via some contribution site?

I hope what I wrote makes sense!

Regards

Mike

If you operate as Owner-Director Ltd Co., going into higher rate tax is entirely a matter of your decisions.
The Ltd Co earns revenue (income)
The Ltd Co deducts expenses
The Ltd Co then has a profit, which will be subject to Corporation Tax
What is left is "retained profits" and can be paid out to the Owner as dividend (subject to taxation once the Dividend Allowance is exceeded).

The expenses incurred by the Ltd Co includes factors that are in the control of the Director. 
What salary do you draw?
What employer pension contributions are made?
How do you fund motor vehicle costs?

The Director also has control over the timing of certain expenses, so the Director may draw less (salary / dividend) in 2023-24 tax year (to avoid a higher rate band) and then draw more next tax year (when total may be less than higher rate band).

The employer pension contributions are effective as they avoid employment taxes (NI), Corporation Tax and Income Tax.  
Not the only option, though.

It might be worth a professional Accountant reviewing your whole arrangement to get you back on the path to tax efficiency.

Halabala9

eskbanker said:

Mike997 said:

Do I pay that £3000 to HMRC via some contribution site?

No, you make an employer contribution to a pension.

But how? Is that £3k paid to HMRC, or some pension provider? I am trying to understand how anything above State Pension works, as I was always paying myself the minimum salary just to get the state pension, so have never had to worry about that before.

eskbanker

Mike997 said:

eskbanker said:

Mike997 said:

Do I pay that £3000 to HMRC via some contribution site?

No, you make an employer contribution to a pension.

But how? Is that £3k paid to HMRC, or some pension provider? I am trying to understand how anything above State Pension works, as I was always paying myself the minimum salary just to get the state pension, so have never had to worry about that before.

You simply open a private pension with any pension provider and pay into that.  There are many providers of SIPPs (self-invested personal pensions) who will accept contributions from limited companies....

https://www.moneysavingexpert.com/savings/cheap-sipps/

Halabala9

eskbanker said:

Mike997 said:

eskbanker said:

Mike997 said:

Do I pay that £3000 to HMRC via some contribution site?

No, you make an employer contribution to a pension.

But how? Is that £3k paid to HMRC, or some pension provider? I am trying to understand how anything above State Pension works, as I was always paying myself the minimum salary just to get the state pension, so have never had to worry about that before.

You simply open a private pension with any pension provider and pay into that.  There are many providers of SIPPs (self-invested personal pensions) who will accept contributions from limited companies....

https://www.moneysavingexpert.com/savings/cheap-sipps/

Cheers, I will look into it. So a theoretical example, if I pay myself £3000 via my ltd company towards director pension, do I then I need to add some % of it as director too?

I am just trying to understand if that 3% - 5% applies to one man band Ltds too - https://www.gov.uk/workplace-pensions/what-you-your-employer-and-the-government-pay

eskbanker

Mike997 said:

eskbanker said:

Mike997 said:

eskbanker said:

Mike997 said:

Do I pay that £3000 to HMRC via some contribution site?

No, you make an employer contribution to a pension.

But how? Is that £3k paid to HMRC, or some pension provider? I am trying to understand how anything above State Pension works, as I was always paying myself the minimum salary just to get the state pension, so have never had to worry about that before.

You simply open a private pension with any pension provider and pay into that.  There are many providers of SIPPs (self-invested personal pensions) who will accept contributions from limited companies....

https://www.moneysavingexpert.com/savings/cheap-sipps/

Cheers, I will look into it. So a theoretical example, if I pay myself £3000 via my ltd company towards director pension, do I then I need to add some % of it as director too?

I am just trying to understand if that 3% - 5% applies to one man band Ltds too - https://www.gov.uk/workplace-pensions/what-you-your-employer-and-the-government-pay

No and no!

Grumpy_chap

Mike997 said:

Cheers, I will look into it. So a theoretical example, if I pay myself £3000 via my ltd company towards director pension, do I then I need to add some % of it as director too?

I am just trying to understand if that 3% - 5% applies to one man band Ltds too - https://www.gov.uk/workplace-pensions/what-you-your-employer-and-the-government-pay

No.

The requirement for auto-enrolment (and the associated 3% - 5%) does not apply to one person Owner-Director Ltd Co.

The Ltd Co. will make an employer contribution to the pension, so it is a gross contribution and will not be immediately topped up on entry.  (Unlike a personal contribution.)

It might be worth revieing your pension provision in a wider context also.  If you are earning around £50k (higher tax band) (assume not Scotland) and relying on solely State Pension, you may find that does not give the level of retirement income you desire.

Halabala9

Grumpy_chap said:

Mike997 said:

Cheers, I will look into it. So a theoretical example, if I pay myself £3000 via my ltd company towards director pension, do I then I need to add some % of it as director too?

I am just trying to understand if that 3% - 5% applies to one man band Ltds too - https://www.gov.uk/workplace-pensions/what-you-your-employer-and-the-government-pay

No.

The requirement for auto-enrolment (and the associated 3% - 5%) does not apply to one person Owner-Director Ltd Co.

The Ltd Co. will make an employer contribution to the pension, so it is a gross contribution and will not be immediately topped up on entry.  (Unlike a personal contribution.)

It might be worth revieing your pension provision in a wider context also.  If you are earning around £50k (higher tax band) (assume not Scotland) and relying on solely State Pension, you may find that does not give the level of retirement income you desire.

I think I am going to setup a Vanguard Personal Pension account. It seems like a reasonable option from what I can see. Contributing £4000, will save me £800 of CT and £1200 on Higher Tax rate, so I will go for it. On top of that I need to start saving towards my pension anyway, as I am not getting younger, so it might be a great opportunity.