Pensions for thickies!

EdInvestor

We have seen it many times on here where someone has picked the HL MM funds as their fund option and is getting worse performance and higher charges than a stakeholder or personal pension internal fund.

I believe we've actually seen this once. :rolleyes:

meester

ffacoffipawb wrote: »

All the pension contributions appear to be allowable against the IR35 deemed payment even if they aren't allowable against CT.

That's not relevant to the additional NI you are choosing to pay.

loucyp

Wow, you go away overnight and come back to....

Some great advise there. Much to think about.

A few last things:

1. Yes, as an IT contractor I am worried about IR35 and so pay £15K salary instead of, say, 5K.

2. Say my pre-tax profits are £50K. I pay salary of 15K, dividends of 20K, does that mean the company can pay the remaining 15K into the pension?

Consequently: Say my pre-tax profits are £100K. I pay salary of 15K, dividends of 20K, does that mean the company can pay the remaining 65K into the pension?

Many thanks
Lou

meester

loucyp wrote: »

Wow, you go away overnight and come back to....

Some great advise there. Much to think about.

A few last things:

1. Yes, as an IT contractor I am worried about IR35 and so pay £15K salary instead of, say, 5K.

I'm pretty sure you could cut that to say £10k and use the extra tax saved to buy IR35 insurance. I think the cost works out about the same.

2. Say my pre-tax profits are £50K. I pay salary of 15K, dividends of 20K, does that mean the company can pay the remaining 15K into the pension?

If you are talking about GROSS profits of £50k, then the £15k salary is deducted leaving £35k. If you want to pay £20k dividends, then that needs to be Corporation Tax paid, which would be £20k / 0.79 = £25,316 off the £35k, leaving a potential £9,684 to be paid into a pension.

Your total income (savings income + salary + dividends) should be the same as the personal allowance + basic rate allowance, meaning zero higher rate tax paid. For 2008-09, the PA is £5435, and the BRA is £36k. Hence there is a total of £41,435. Assuming £500 of savings income, £15,000 salary that leaves a £25,935 GROSS dividend, or £23341 net of 10% notional tax credit (money received). So you pay out £23,341, which is actually £29,546 of pre-Corporation Tax income, leaving only £5,454 to pay (sensibly) into the pension.

Consequently: Say my pre-tax profits are £100K. I pay salary of 15K, dividends of 20K, does that mean the company can pay the remaining 65K into the pension?

Again, not quite, because the £15k is Corporation Tax deductible, but the dividends are not. Assuming a £23k dividend (which better utilises your Basic Rate Allowance), after paying CT (21% of gross) on the dividend, there would be something like £59k which you could pay into the pension.

meester

ffacoffipawb wrote: »

It probably is, but I think that what I do may fall under the remit of IR35, despite so called clauses in my contract (substitution etc), so to pay a reasonable salary instead of a silly low one may be more sensible. I have been at the same place of work since June last year and the contract may well be renewed for a third 6 months in May. If it goes to 2 years I believe I will fall under IR35 then, even if I get away with it now.

That's not the case at all. The working practices are relevant. Two years is completely not. Plenty of people work places more than 2 years and have been found to be outside IR35. The only thing 2 years affects is whether your workplace is deemed temporary or not wrt travelling expenses

If you work on a piece basis (analogous to a builder building a conservatory, then being asked to build a swimming pool, then a rear-extension), rather than daily work under the control of a boss, then you will generally be outside IR35.

loucyp

Thanks again. Finally I understand what's going on with these pensions

loucyp

Oh no, wait, I have another question:

Can I only make pension contributions based on my profits for this financial year?

Say for example I have money accumulating in the business over the years, eg 50K.

To take my example from above, ie:

If you are talking about GROSS profits of £50k, then the £15k salary is deducted leaving £35k. If you want to pay £20k dividends, then that needs to be Corporation Tax paid, which would be £20k / 0.79 = £25,316 off the £35k, leaving a potential £9,684 to be paid into a pension.

So, this year I have £9,684 left over after all taxes, salary etc + the 50K still in my business account.

How much can I contribute to the pension?

Is it only the £9,684 from this year, or can i contribute up to £59,684?

Many thanks
Lou

meester

loucyp wrote: »

Oh no, wait, I have another question:

Can I only make pension contributions based on my profits for this financial year?

Say for example I have money accumulating in the business over the years, eg 50K.

To take my example from above, ie:



So, this year I have £9,684 left over after all taxes, salary etc + the 50K still in my business account.

How much can I contribute to the pension?

Is it only the £9,684 from this year, or can i contribute up to £59,684?

There is no point, because you cannot get tax-relief on the £50k - tax has already been paid on it.

Best take out as much as you can via dividends, and on winding up the company try and distribute as a capital gain (10% CGT).

Pension payments should always be made out of the current year's profits. But there's no reason why you shouldn't pay an outsized pension payment out of the current year's profits, leaving you with very low profits, and using some of the retained income as your basic-rate dividend.

The effect is the same.

I.e. using simple numbers

Y1, £40k net profit, 20% CT = £32k after tax, pay out £20k dividend, £12k retained income in company.
Y2, £40k net profit, pay £20k pension, leaving £16k after tax, £16k dividend + £4k dividend from retained income = £20k total dividend.

Which gives

£40k total dividends, £20k pension, and £8k retained income

vs.

Y1, £40k net profit, make £10k pension, payment, leaving after 20% CT = £24k, pay out £20k dividend, £4k left in company.

Repeat year in two, gives £40k dividends, £20k pension, and £8k left in company.

The effect is the same.

You can make a pension payment up to the amount of your net profit in any year. Providing that you have sufficient retained income to make appropriate dividend distributions (wrt your basic rate allowance), you use the retained income to make the dividend distribution (always use your basic rate allowance in full), and the current year's profits to make the pension payment.

So the fact that you cannot get the CT paid back is only really going to affect you if you have stopped trading and decide you want to go back and 'un-pay' that CT - you can't. For going concerns, pension payments out of current year's profits are unlikely to be present a problem.

loucyp

Sir, I salute you

:T

ffacoffipawb

meester wrote: »

There is no point, because you cannot get tax-relief on the £50k - tax has already been paid on it.

Best take out as much as you can via dividends, and on winding up the company try and distribute as a capital gain (10% CGT).

Pension payments should always be made out of the current year's profits. But there's no reason why you shouldn't pay an outsized pension payment out of the current year's profits, leaving you with very low profits, and using some of the retained income as your basic-rate dividend.

The effect is the same.

I.e. using simple numbers

Y1, £40k net profit, 20% CT = £32k after tax, pay out £20k dividend, £12k retained income in company.
Y2, £40k net profit, pay £20k pension, leaving £16k after tax, £16k dividend + £4k dividend from retained income = £20k total dividend.

Which gives

£40k total dividends, £20k pension, and £8k retained income

vs.

Y1, £40k net profit, make £10k pension, payment, leaving after 20% CT = £24k, pay out £20k dividend, £4k left in company.

Repeat year in two, gives £40k dividends, £20k pension, and £8k left in company.

The effect is the same.

So does this look acceptable to you ....

Year ending 31/5/2008 ....
Earnings after VAT sent to HMRC, travel expenses and accountancy/set-up/payroll = £68k
less Salary £6k
less Eer NI = £0 (pretty much)
less Pension £24k
Gives Pre Tax Profit = £38k
less CT £8k (say)
Net Profit £30k
distributed as ...
Interim dividends already received £9k net (this tax year)
Final Dividend in June £21k (next tax year).

Full CT relief on the pension contribution, despite the fact it is 400% of salary??

Do we have a tax inspector to comment on this?