Pension contributions - personal or through company?

[anorak]

Which are more tax efficient; contributions through my company or personal payments?

Working through a limited company my gross annual earnings before any tax / expense deductions are about £100k. I draw a salary of £16k and dividends of about £30k, so am in the 32.5% tax bracket. I'm outside of IR35 and have an existing stakeholder pension.
If I want to contribute a lump sum of £10k into my pension would it be more tax efficient to do this through my company or personally?

My accountant says the former, but through the personal payment route isn't the personal tax relief at 32.5%? Am I missing something?

[ASB]

Am I missing something?

Yes. The search button will yield results. In your position it may well be that increasing you dividends and making a personal contribution is more tax efficient.

Try these to start

http://forums.contractoruk.com/thread13522-pension.html
http://forums.contractoruk.com/thread12402-pension.html
http://forums.contractoruk.com/thread10482-pension.html

[glashIFA@Paramount]

Which are more tax efficient; contributions through my company or personal payments?

Working through a limited company my gross annual earnings before any tax / expense deductions are about £100k. I draw a salary of £16k and dividends of about £30k, so am in the 32.5% tax bracket. I'm outside of IR35 and have an existing stakeholder pension.
If I want to contribute a lump sum of £10k into my pension would it be more tax efficient to do this through my company or personally?

My accountant says the former, but through the personal payment route isn't the personal tax relief at 32.5%? Am I missing something?

Company.

[anorak]

Company.

Why?

Most other posts that I have read suggest personal payments are more tax efficient, hence my confusion.

[THEPUMA]

The answer in your particular circumstances is that you are better off paying yourself an additional dividend and then making a personal pension contribution out of this.

Due to an anomaly in the tax legislation, you will effectively get 44.5% tax relief (22% at source + 22.5% [32.5% - 10%] on the dividend) in this way as opposed to 39.25% if you made a company contribution.

[minstrel]

Company.

I disagree.

How do you come to that conclusion? Please show your calculations so we can validate your logic.

[glashIFA@Paramount]

I disagree.

How do you come to that conclusion? Please show your calculations so we can validate your logic.

Okay, firstly i must point out that i did make some assumptions. If you are paying £10K as a personal contribution then i have assumed that this is the net contribution which is £12,820 gross. Dividends don't count as pensionable income so anorak has £16K salary to play with less £12,820 which leaves £3,180. So if the gross contribution to his/her stakeholder is more than £265 pm and/or if you intend to make any other contribs in "pension input period" (which are other assumptions i have made) then salary would have to be increased to accomodate this which means more employer NI and more employee NI and Income Tax.

Also, as a side issue, the revenue is more "relaxed" about the level of contrib you can make as an employer in relation to employees salary and a company contrib will keep you off the Local Inspector of Taxes radar.

However, if my assumptions are wrong then i am quite happy to concede to THEPUMA and minstrel and apologise if I've misguided anyone.

[minstrel]

However, if my assumptions are wrong then i am quite happy to concede to THEPUMA and minstrel and apologise if I've misguided anyone.

OK. Maybe we can agree that if your salary is a fixed variable, and dividends distributed will vary based on whether the contribution is made via the company or personally then:

1. It is most tax efficient to make the payment personally provided your total pension contributions do not exceed 100% of salary.

2. If you want to contribute more than 100% of salary it would be best to pay upto 100% salary as personal contributions and the remainder via the company.

In other words you should never increase your salary solely for the purpose of increasing the amount you can contribute to you pension. I fully agree with you that increasing your salary to increase your relevant earnings and annual contribution limit is less efficient than making the additional contribution via the company.

Also, as a side issue, the revenue is more "relaxed" about the level of contrib you can make as an employer in relation to employees salary and a company contrib will keep you off the Local Inspector of Taxes radar.

Maybe - although personally I'm not convinced. If the law says I can contribute up to 100% of relevant earnings to a pension then HMRC can be as unrelaxed as it likes, but they can't tell me I've done anything wrong.

As to whether making high pension contributions raises a red flag and puts me on the tax man's radar, I'm equally sceptical. I'm sure a low salary/high dividend profile would raise more red flags than high pension contributions. After all paying more into pension funds is what the government are encouraging us to do.

[ASB]

Okay, firstly i must point out that i did make some assumptions. If you are paying £10K as a personal contribution then i have assumed that this is the net contribution which is £12,820 gross. Dividends don't count as pensionable income so anorak has £16K salary to play with less £12,820 which leaves £3,180. So if the gross contribution to his/her stakeholder is more than £265 pm and/or if you intend to make any other contribs in "pension input period" (which are other assumptions i have made) then salary would have to be increased to accomodate this which means more employer NI and more employee NI and Income Tax.

Also, as a side issue, the revenue is more "relaxed" about the level of contrib you can make as an employer in relation to employees salary and a company contrib will keep you off the Local Inspector of Taxes radar.

However, if my assumptions are wrong then i am quite happy to concede to THEPUMA and minstrel and apologise if I've misguided anyone.

Essentially you are saying that max personal contibutions of 100% of salary get tax relief, thus it may be necessary to increase salary and suffer the tax an NI consequences - which would obviously make it an inefficient routes.

Is thought that post A day the link between salary and contributions was removed (although I am not at all sure and have found the guidance somewhat confusing)

[glashIFA@Paramount]

Essentially you are saying that max personal contibutions of 100% of salary get tax relief, thus it may be necessary to increase salary and suffer the tax an NI consequences - which would obviously make it an inefficient routes.

Is thought that post A day the link between salary and contributions was removed (although I am not at all sure and have found the guidance somewhat confusing)

Yes i understand, although they called it pensions simplification, as always, it's anything but. If it's a personal contribution then you can contribute 100% of salary and claim tax relief at your highest marginal rate. If it's an employer contribution then it is possible to contribute at a higher level then salary, subject to certain limits. So I'm afraid that post A-Day the link between salary and contributions, although much more generous, is still very much there.