Hi All
On the advice of my accountant I pay myself a salary that hits the personal allowance limit in order to maximise my tax benefits. However I also own a couple of BTL properties (no mortgages) which bring in rental income of about £34,000 per annum. Therefore when combined with my salary it takes me very close (about £2000 short) of the higher income threshold of £41,865.
The situation is that my earnings have gone up tremendously recently and by the end of the year I stand to have retained profits of about £50,000 in my limited company from this year alone. If I were to take more than £2000 of this as dividends it would trigger the 25% tax rate. To avoid this, I was considering starting a pension and paying in the annual maximum of £40,000.
However, taking out pension will have some pitfalls for me. The biggest one is that although I am currently a basic rate tax payer (thanks to my salary structure), due to the other investments I currently have (BTLs, ISAs etc), it is highly likely that in retirement my income will be close to the higher tax threshold, in which case drawing my pension (after taking the 25% lump sum) would probably push me over the threshold and I will therefore be paying 40% on my pension income.
I know many people talk about how tax beneficial it is to have a pension but this would seem to apply more to those who are currently high rate tax payers but will be basic rate payers in retirement. In my situation I'm not so sure there is much of a tax benefit.
Therefore is it better for me to take the 25% tax hit against dividends now or to take the probable 40% hit on my pension income in 15 years time? I know 15 years is a long time and anything could happen but I need to decide now as the opportunity to take the dividends is relevant to the present time.
Thanks in advance
On the advice of my accountant I pay myself a salary that hits the personal allowance limit in order to maximise my tax benefits. However I also own a couple of BTL properties (no mortgages) which bring in rental income of about £34,000 per annum. Therefore when combined with my salary it takes me very close (about £2000 short) of the higher income threshold of £41,865.
The situation is that my earnings have gone up tremendously recently and by the end of the year I stand to have retained profits of about £50,000 in my limited company from this year alone. If I were to take more than £2000 of this as dividends it would trigger the 25% tax rate. To avoid this, I was considering starting a pension and paying in the annual maximum of £40,000.
However, taking out pension will have some pitfalls for me. The biggest one is that although I am currently a basic rate tax payer (thanks to my salary structure), due to the other investments I currently have (BTLs, ISAs etc), it is highly likely that in retirement my income will be close to the higher tax threshold, in which case drawing my pension (after taking the 25% lump sum) would probably push me over the threshold and I will therefore be paying 40% on my pension income.
I know many people talk about how tax beneficial it is to have a pension but this would seem to apply more to those who are currently high rate tax payers but will be basic rate payers in retirement. In my situation I'm not so sure there is much of a tax benefit.
Therefore is it better for me to take the 25% tax hit against dividends now or to take the probable 40% hit on my pension income in 15 years time? I know 15 years is a long time and anything could happen but I need to decide now as the opportunity to take the dividends is relevant to the present time.
Thanks in advance
Comment