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  • FIRST POST
    • Fulham_Mark
    • By Fulham_Mark 12th Mar 18, 11:13 AM
    • 238Posts
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    Fulham_Mark
    Does pension tax-relief apply to dividend income?
    • #1
    • 12th Mar 18, 11:13 AM
    Does pension tax-relief apply to dividend income? 12th Mar 18 at 11:13 AM
    This year I will get (let's say) 10,000 from dividends on top of an average salary in 20% tax range. Let's say 30,000

    5,000 of the dividend income is tax-free as the dividend allowance I think.

    The next 5,000 is taxed at 7.5%? Not 20%? - what gov.uk site tells me

    So if I made a 10,000 pension contribution in this tax-year..

    What happens? I don't pay 7.5% income tax on 5,000?
    Or I don't pay 20% tax on some of my other income?


    Hope that makes sense - think I understood what happened with pensions and normal salary but the dividend tax rate is much lower and so the pension tax-relief doesn't seem as good

    many thanks
Page 1
    • dunstonh
    • By dunstonh 12th Mar 18, 11:20 AM
    • 92,999 Posts
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    dunstonh
    • #2
    • 12th Mar 18, 11:20 AM
    • #2
    • 12th Mar 18, 11:20 AM
    Are you a director?

    Normally, directors would pay via the company and not make personal contributions. That is the more tax efficient method. Plus, you get the full annual allowance.

    If you are stuck doing personal contributions for some reason, then you can only contribute to the pension against your salary. Not the dividends.

    So, if the salary was 30k and dividends 10k then you can only pay 30k into the pension. The dividends do not support pension contributions.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • Fulham_Mark
    • By Fulham_Mark 12th Mar 18, 12:54 PM
    • 238 Posts
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    Fulham_Mark
    • #3
    • 12th Mar 18, 12:54 PM
    • #3
    • 12th Mar 18, 12:54 PM
    Ah thanks!
    I didn't know this.
    That will definitely be the best option then!
    • Dazed and confused
    • By Dazed and confused 12th Mar 18, 12:58 PM
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    Dazed and confused
    • #4
    • 12th Mar 18, 12:58 PM
    • #4
    • 12th Mar 18, 12:58 PM
    Unless the dividends are in a particular tax wrapper such as an ISA then they are not "tax-free" but some may fall to be taxed at a 0% tax rate (known as the Dividend Allowance).

    The pension tax relief entirely depends on how you are making this payment. Are you getting a salary of 40,000 and having 10,000 deducted out of pre tax income leaving a taxable salary of 30,000?

    Or are you (as an individual) paying 10,000 into a personal pension/SIPP?

    You need to provide some clarity around the payment method for the tax relief element to be answered.
    • Fulham_Mark
    • By Fulham_Mark 12th Mar 18, 3:02 PM
    • 238 Posts
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    Fulham_Mark
    • #5
    • 12th Mar 18, 3:02 PM
    • #5
    • 12th Mar 18, 3:02 PM
    Dividends are from my ltd company not in an ISA.
    I did a quick check and the company can pay into my pension (a bit like an expense) before taxes paid.

    But with the 1000 interest tax-allowance, if that went into a pension it would have some tax benefit. I think...
    • Dazed and confused
    • By Dazed and confused 12th Mar 18, 3:08 PM
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    Dazed and confused
    • #6
    • 12th Mar 18, 3:08 PM
    • #6
    • 12th Mar 18, 3:08 PM
    There is no 1,000 interest tax "allowance", it's like the "dividend allowance", a 0% tax rate.

    If the company is paying them you personally won't get any tax relief, as dunstonh has explained the company gets the tax benefit.

    If you were paying into a personal pension/SIPP and had total taxable income of 40k then you would get basic rate tax relief added to the pension fund by the pension company (2.5k on a 10k contribution) but you couldn't get any further tax relief as you haven't paid any 40% tax if your income is only 40k.
    • dunstonh
    • By dunstonh 12th Mar 18, 3:46 PM
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    dunstonh
    • #7
    • 12th Mar 18, 3:46 PM
    • #7
    • 12th Mar 18, 3:46 PM
    But with the 1000 interest tax-allowance, if that went into a pension it would have some tax benefit. I think...
    That does not apply to pensions or your company.

    As a director of own company, you can contribute upto 40,000 a year (unless you total personal income is high enough to trigger tapering of the annual allowance). You can possibly pay more through carry forward as well.

    The pension is an allowance expense. So, it reduces your CT bill. It gest the money out of the company into the pension and avoids any personal taxation or NI (as well as the lower CT bill).
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • Fulham_Mark
    • By Fulham_Mark 12th Mar 18, 4:37 PM
    • 238 Posts
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    Fulham_Mark
    • #8
    • 12th Mar 18, 4:37 PM
    • #8
    • 12th Mar 18, 4:37 PM
    thanks.
    I found this article as well that seems to show the benefit of paying from the Ltd Company.
    https://www.accountingweb.co.uk/tax/personal-tax/tax-relief-on-pension-contributions-unravelled

    My worry behind all this is that I have some P2P savings where in any month I may make 1000 or lose 500 interest, so until the end of the tax year I don't know how much I will have made.
    If I do well and tip over into the 40% band then I understand that the 0% rate on interest drops to 500 from 1000 which will be expensive.
    So was looking into ways that may still get money out of company but allow for the possibility of having a good final month of P2P.
    • dunstonh
    • By dunstonh 12th Mar 18, 4:50 PM
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    dunstonh
    • #9
    • 12th Mar 18, 4:50 PM
    • #9
    • 12th Mar 18, 4:50 PM
    My worry behind all this is that I have some P2P savings where in any month I may make 1000 or lose 500 interest, so until the end of the tax year I don't know how much I will have made.
    Not a problem. March is directors month as far as pension contributions go. Loads wait until then before deciding how much to pay in.

    If I do well and tip over into the 40% band then I understand that the 0% rate on interest drops to 500 from 1000 which will be expensive.
    Take lower dividends until the last month then. If you have extra, you won't need the dividends and can put it in the pension instead.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
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