Max Company Pension Contributions

Dithering_Dad

Hi, I wonder if anyone can help. I'm currently working as an I.T. contractor within my own limited company and pay a contribution each month into my and my wife's (she's the company secretary) pension plans. This is paid as Employer contributions directly from the company bank account - saving us ER & EE National Insurance and/or Corporation tax..

I know that since "A Day", everyone is allowed to contribute 100% of their salararies into a pension plan, but does anyone know if there is a limit to what an employer could pay into one?

For instance, if my company profit after expenses is 80k, could I put 40k into my pension and 40k into my wife's pension, while just paying myself £12k and my wife £4k a year?

Any help would be very welcome

ta.

Debt_Free_Chick

From a pension point of view, you can each have contributions to the value of £235k going into your pension plans this year, including any contributions you make which follow the rules outlined in your post.

From a pension point of view, you should be OK. But in order for the company to get the tax relief, it has to follow the usual rules (wholly and exclusively connected with the business) and it must not be "excessive".

It's for the local inspector to decide whether a £40k contribution towards a pension for someone earning only £4k is excessive or not. You might be able to argue that it's not excessive if your wife has no other pension savings and that the contributions are a way of "catching up".

Difficult one ..... might be one to take advice on.

Dithering_Dad

Thanks DFC. I have read a bit around the subject on contractor websites, but the area is so woolly (like many of Labour's ideas) that no one knows what to do until a test case comes along. Naturally, I don't want to be that test case.

I guess I could ask the question of my accountant, but that last thing I want to do is raise my head above the parapet and have the Revenue notice me. God almighty, what a way to run a business. In fact, what a way to run a country!

I guess an option is to pay 20% of salary into the pension scheme directly from the company and then pay myself and missus a larger salary but then pay the pension from net deductions. Not ideal because my wife's pension will never catch mine up and I'll have a hefty NI bill.

I was aiming to blitz my pension once my" Mortgage Free in 3" challenge was complete, but perhaps I should just have a "Mortgage Free and Pension Potted Up in 5" challenge instead.

Ho hum.

Debt_Free_Chick

It's difficult as HMRC have no published guidelines for what they consider to be excessive. I guess your IR35? If so, then we have to consider that you might be subject to closer scrutiny, already :mad:

I would have thought a company contribution of 100% of salary could be justified. After all, that's considered to be an acceptable amount for you to make personally. But beware .... I am simply speculating. Perhaps your accountant could find out more from the local HMIT?

Dithering_Dad

The trouble is that my "Salary" is only 11k, the rest is in dividends. It's even worse with my wife because she gets paid 4k. While a combined 15k each year into a pension pot is pretty good, it's not quite the "blitz" I was hoping for.

It also doesn't help redress the balance between my wife and my retirement pots. Looks like I'll be the chief breadwinner in retirement just as I am now - with the resulting tax impact.

I guess an alternative of putting 100% of our salaries into the pension plans via company contributions and then 100% into my wife's pension via personal contributions would level things out a bit, with 11k in my pension and 8k in Mrs Dithers.

Another alternative that I've just thought of is to create a "Final Salary" style pension, where I leave a large chunk of money in my company from each invoice and then take this out at retirement time by continuing to pay us both a small salary each month. The down side of this is that there are no tax incentives - I'll get corp taxed on the savings and then income taxed on the "pension" payments.

Argh!! Is there no way for the ordinary man to get by? Maybe I should start up a bank, run it into the ground by loaning stupid money to people who have no chance of paying it back, get bailed out by the bank of england and then leave with a lovely pay off!! GRR!! :mad:

EdInvestor

Dithering_Dad wrote: »

Argh!! Is there no way for the ordinary man to get by?

Not sure how we can really feel sorry for you if you're earning something like 80k but only paying tax on 11k, frankly.....

MickKnipfler

I'm in exactly the same situation. My accountant recommends that I don't pay the Co Sec anything as she hardly does anything. he also recommends that Co Pension Contributions shouldn't exceed annual Salary. I did write to HMRC (twice) about this...... no reply.

Dithering_Dad

EdInvestor wrote: »

Not sure how we can really feel sorry for you if you're earning something like 80k but only paying tax on 11k, frankly.....

I pay tax on the dividends I pay to myself, I also pay Corporation tax and Employer's and employee's NI.

Try to keep up Ed....

p.s. just how much tax did you pay last year ed?

Dithering_Dad

MickKnipfler wrote: »

I'm in exactly the same situation. My accountant recommends that I don't pay the Co Sec anything as she hardly does anything. he also recommends that Co Pension Contributions shouldn't exceed annual Salary. I did write to HMRC (twice) about this...... no reply.

It's such a grey area all round - no wonder the Revenue are losing computer disks and getting everyone's PAYE calculations wrong with such a complex tax regime! They probably don't know whether they're coming or going!

I remember when Brown's idiotic Working Tax Credit first came in, it was such a nightmare burden on businesses that they rebelled and he had to get the Revenue to administer it instead. hmnn, great idea Gordy!

EdInvestor

Dithering_Dad wrote: »

I pay tax on the dividends I pay to myself

That's be at 25% rather than the 40% you would pay if they were salary I assume?

I have no objection to people using the system to avoid paying as much tax as possible, but I do wish they wouldn't whinge about it so much when they're clearly well off. How about complaining about something seriously wrong, like the people affected by the withdrawal of the 10p band?

Dithering_Dad

EdInvestor wrote: »

That's be at 25% rather than the 40% you would pay if they were salary I assume?

I have no objection to people using the system to avoid paying as much tax as possible, but I do wish they wouldn't whinge about it so much when they're clearly well off. How about complaining about something seriously wrong, like the people affected by the withdrawal of the 10p band?

The dividends have been taxed at 20% already, so if you get into high-rate tax territory, you're actually paying 45% - The 25% on the dividend and the 20% corp tax (which will soon be 22% for small businesses).

Where you're hit as a 'shareholder' in your own company is that not only do you pay the 25% on the dividend, you're actually also paying the 20% Corp Tax. Unlike an investor in a PLC (Say HSBC PLC) where HSBC pay the Corp Tax and so the shareholder's liabilities are only 25%.

Don't blame me for Labour's decision on 10% tax - I'm just trying to do my best for my own family. I have a disabled daughter (she has a rare chromosomal disorder) which means my wife cannot work as she looks after her. I therefore have to effectively bring in two average incomes so anything I can do to make the most of my money, I will do it - whether you like it or not.

Seems annoying to have a 'lady of a certain age' who lives in the luxury provided to her by her husband whinging at me for trying to provide the best I can for my wife and two daughters.