Basic pensions question

[MOBB]

I'm about to setup a pension scheme for my Ltd Company, I'm the only employee.

I pay myself a small salary, and top it up with dividends - last year I only paid myself up to the higher rate limit, but this year I will go into higher rate tax.

My question is around tax relief - if I get the company to pay all of my contributions, the company gets corporation tax relief on that.

Is that it as far as tax relief is concerned? Or do I get further tax relief when I complete my self assessment?

In my mind if I get the company to pay the contributions, I get say 20% tax relief, but if I deduct them from my net pay, I can get 40% relief if I'm a higher rate taxpayer.

Cant be right as the internet says its usually better to get the company to pay them.

What am I missing here?

[XJ75]

I think you are getting the full tax relief by default by paying direct from your company account.

If you were to withdraw from the company account (either as salary or dividends), you would attract higher rate tax on that withdrawal, but by paying directly into the pension, you pay no tax on that (plus as you mentioned you can offset against corporation tax).

[PurpleMoonlight]

The employer contributions will get corporation tax relief.

Your personal contributions would not get tax relief because you haven't paid any 'earned' income tax, unless you limit your contribution to the de minimis amount of £2880 where £720 would be added by HMRC regardless.

[Granfondo]

The most important bit isn't the tax relief but the charges of the wrapper provider and the IFA if one is involved. IMO

[EddieSteadyGo]

The way I like to think about it is that the money which is paid into your pension (within certain rules and limits) doesn't get taxed on the way in. Just on the way out.

So if you get your company to make a contribution directly, it is paid before before corporation tax.

If you decided to take a salary and decided to pay into your pension that way, you could get back the money which had been deducted from your salary in income tax.

When you think about in the context that the money which goes in should be tax free, it makes it easier not to get mixed up with what tax relief might apply.

[Tiggsy]

Think of it like this -

You pay yourself the money as divs or pay and you pay income tax (this is what you think you want to dodge)

Instead the comp pays that money into the pension before you see it (and thus is an expense so lowers profits and lowers corp tax)

So you never pay income tax...so have nothing to dodge! Hence you dodge it!

[Jockman]

If the company pays, there is no link to your earned income level.

If you pay, then you are limited to your earned income level.

Dividends are not earned income.

[ianrb]

When the company makes a contribution to your pension there is no Income Tax or NI (both employer's and employee's) to pay, so it will save more than just the 20% tax.

[JulianPH]

PurpleMoonlight said:

The employer contributions will get corporation tax relief.

Your personal contributions would not get tax relief because you haven't paid any 'earned' income tax, unless you limit your contribution to the de minimis amount of £2880 where £720 would be added by HMRC regardless.

The OP says he pays himself a salary up to the higher rate tax level and is about to go over that, so there is plenty of earned income.

OP - As others have said, if the company makes the pension contribution you pay zero income tax on this (which is the equivalent of getting all your income tax back) and the company saves corporation tax on the contributions - so it is win win doing it this way.

You could also (at a later date) look to put your business premises into your SIPP and then your company would pay rent into your SIPP on top of the pension contributions. That is always a beautiful arrangement.

[PurpleMoonlight]

JulianPH said:

The OP says he pays himself a salary up to the higher rate tax level and is about to go over that, so there is plenty of earned income.

OP - As others have said, if the company makes the pension contribution you pay zero income tax on this (which is the equivalent of getting all your income tax back) and the company saves corporation tax on the contributions - so it is win win doing it this way.

You could also (at a later date) look to put your business premises into your SIPP and then your company would pay rent into your SIPP on top of the pension contributions. That is always a beautiful arrangement.

He said small salary plus Dividends. I assume salary is all income tax free.

[JulianPH]

PurpleMoonlight said:

JulianPH said:

The OP says he pays himself a salary up to the higher rate tax level and is about to go over that, so there is plenty of earned income.

OP - As others have said, if the company makes the pension contribution you pay zero income tax on this (which is the equivalent of getting all your income tax back) and the company saves corporation tax on the contributions - so it is win win doing it this way.

You could also (at a later date) look to put your business premises into your SIPP and then your company would pay rent into your SIPP on top of the pension contributions. That is always a beautiful arrangement.

He said small salary plus Dividends. I assume salary is all income tax free.

I'm with you, I had read it differently. Obviously he should go for the company contribution anyway.