I'm told "you are doing it the wrong way around"

There are plenty of articles on the relative merits of ISAs and pensions with the major difference being accessibility (and all that comes with - i.e. accessible to creditors, being within scope of means tests, counting as part of your 'estate' for inheritance taxes etc) vs inaccessibility as the price for additional and lucrative income tax relief as a pension contribution.

Building your accessible wealth and reinvesting company profits in your business rather than locking away money until your late 50s can be a very useful thing to do. But at the end of the day life is about balance - you will be disappointed as a retiree with no pension pot of income to use up your annual income tax allowance, but you will also be disappointed as a retiree with no home to call your own and having had low lifetime earnings because you never retained any cash within the business to grow it and you never spent money buying a house and creating an emergency fund etc etc while at working age because you were busy stuffing the pension. So the key to long term wealth generation is a mixture of using different vehicles to make the most of all kinds of opportunities.

If you control your own company, pension contributions can be very useful. For example, if you take the money out of the company as a dividend, first the company has to make profits, then you have to pay corporation tax on those profits, and then out of what's left, you can pay dividends, and when you receive the dividends you'll be paying dividend tax once you've burnt through the £5k allowance (dropping to £2k allowance next year).

Whereas if the company makes lower profits because it had the expense of making a pension contribution for you, it saves corporation tax, and you don't need to pay tax on the dividends because you don't get them - you just get the gross untaxed cash in your pension. When you get to your late 50s you draw cash out of the pension and a quarter of it is entirely tax free and the rest is taxed at your marginal rate which might be zero, depending on what other taxable income you have at that point in your life. So, there can be some serious savings to be made.

The amount of tax saved is much more impressive if you are a higher rate taxpayer (i.e. saving corporation tax and high rate dividend tax is a lot more tax relief than corporation tax and lower rate dividend tax). But unless you expect to become higher rate taxpayer in future it seems a shame to be avoiding the opportunity to stuff your pension if your business is generating more cash than you need.

By using a pension,(assuming you can draw a lot of it out at 0% in retirement), the saving of corporation tax plus lower rate dividend income tax is going to be a bit better than the 25% 'bonus' you get on a LISA and is available on a lot more than £4k per year. So, well worth considering ahead of 'normal' S&S ISA for money that you don't need to keep 'accessible' - unless you fully expect to be a high rate taxpayer further down the line, in which case doing S&S ISA now and using it to fund pension contribution later, is quite possibly better (subject to the other pros and cons and potential tax legislation changes).

ian-d wrote: »

Thank you again and as always bowlhead99.

I appreciate the current limits of £40k per annum, but what are the restrictions on balance between personal contributions and LTD company contributions? Must they be paid from the salary I get paid; or can in theory I pay in £100 per month and my LTD company pay in £1,000 per month?

Your company could pay in £40k and you could put in zero if you like.

Effectively your personal contributions are limited to your earnings - because they don't want you to effectively have a negative net salary (though if your salary is under £3600 they will still let you contribute £3600 gross, as a floor level for everyone in the country regardless of earnings). But company contributions are not limited to anything other than the £40k aggregate annual max.

For example say your salary was £30k with a £10k employer pension contribution. You could make a personal gross contribution of £30k to get the whole £40k in the pension. Or, say your salary was £10k with a £30k employer contribution. You could make a personal gross contribution of £10k to get the whole £40k in the pension. HMRC are not fussed either way. They are happy for your employer to spend £40k on your total compensation for working for them and for it all to go into a pension if you would like.

The split of pension to salary is down to you and your employer; obviously you may be caught by minimum wage rules and you probably want to have a salary​enough to qualify for national insurance credit for the year. But once you've decided the gross number for your salary, you could put all that salary into a personal pension yourself (by contributing 80% of it into a pension and having the pension provider claim basic rate tax 'relief at source'); and then the employer can put the difference between the gross number and £40k, directly in to the pension as well.

The question remains, if I go the route of a SIPP, what should I do with the 6 figure pot of Cash ISA? Is there any merit in transferring into a SIPP, or should I keep it locked up in the ISA wrapper (I don't need the funds releasing but it might limit what I can put in a SIPP). I ask because whilst I can transfer across some to a LISA (might as well have one I guess), I don't wish to be investing everything I have from the Cash ISA in a S&S ISA, as well as investing through a SIPP also; that would be too much risk for me personally.

You can move some into a S&S LISA, some into an S&S iSA, and use some for general spending - the latter presumably needed to compensate yourself for the fact that the money now flowing out of the business to your bank account has been significantly curtailed - i.e. because you are only taking a bare minimum salary (which is all being put into a pension) and enough dividends to use up the annual personal allowance and dividend allowance, ensuring you pay no dividend tax or other income tax.

Obviously, leave enough cash back in your ISA or bank account to ensure you are not "over-invested and under-cashed" with respect to your own risk tolerance / capacity for loss.

ian-d wrote: »

I only have a salary of just over £8k, to meet with usual tax and NI requirements; the rest is paid in a side line self-employment business (not cost effective but working on that) and the remainder in dividends. I assume none of these affect the ability to pay in a decent amount of money over the £8k salary, or would that be my limit?

*You* can only put £8k gross into your pension (which you would do by contributing £6.4k into a pension and the pension provider grossing it up to £8k for standard basic rate tax relief which HMRC allows them to do -whether or not you actually paid any tax on the £8k earnings in the first place).

*Your Company* can put [£40k annual limit less the £8k gross that you already put into your pension] into your pension. That cost of providing a pension for its employee / director is a legitimate expense of running its business and it doesn't matter if the pension contributions it chooses to make are well in excess of the current year salary it agrees to pay. In paying large pension contributions it will make less profits and pay lower corporation tax ; and the reduced earnings of the company as a result will leave the company with less available to pay to you as a taxable dividend.

But would removing ISA funds for daily expenses be considered a foolish move with the long term tax exemption benefits of an ISA? It shouldn't come to that, I think I can pay into a pension, keep the full ISA contributions in tact, and still have enough from other savings to keep me going for a few years yet!

You didn't mention you had a load of other savings that weren't in ISAs. Yes, you can use those other savings for living costs and keep the ISAs intact.

Some non-ISA​ savings are very lucrative (e.g. regular saver accounts paying 5% on £500 a month here or £300 a month there) and will bring you a larger return per pound than a cash ISA. Once the amounts get large, it is hard to keep them all in "best buy" accounts and so if the option is to have a small cash ISA and large unwrapped savings vs large ISA and small savings, the latter probably wins. However depending on what you're earning in your sideline self employed business perhaps you don't have enough bank interest to pay any tax on the interest anyway.

Also, if there's a sideline self employed business, the taxable profits from that count as relevant earnings for pension contributions too. So as long as you don't go over the £40k max, you can put in all your gross salary into a pension, and all your self employment profits into a pension, and top it up with a company pension contribution to get to the £40k limit.

Once a SIPP is in place, it cannot be touched until 55 years old right? (or whatever it may have increased to at that time!).

Correct.