Pension Contibutions - Personal vs Comapany Contribution

[AndyK]

I currently contribute £500 per month (net) personally to my pension. I was always led to believe that the combination of the lower rate tax relief directly into my pension and higher rate tax relief through my tax return, meant this was as tax efficient as contributing £625 (gross) directly from my company. My accountant is suggesting contributing from the company is more tax efficient. I’m trying to find an example calculation to demonstrate this. Can anyone help.

PS I’ve had a each through the forum and haven’t been able to locate an example calculation on this subject, but if it’s already been discussed please just direct me to the appropriate thread.

[pmeswani]

I currently contribute £500 per month (net) personally to my pension. I was always led to believe that the combination of the lower rate tax relief directly into my pension and higher rate tax relief through my tax return, meant this was as tax efficient as contributing £625 (gross) directly from my company. My accountant is suggesting contributing from the company is more tax efficient. I’m trying to find an example calculation to demonstrate this. Can anyone help.

PS I’ve had a each through the forum and haven’t been able to locate an example calculation on this subject, but if it’s already been discussed please just direct me to the appropriate thread.

You won't pay the CT on pension contributions made by the company, therefore saving 20% (or whatever it is) straight away. You won't have to pay Employer Tax & N.I. which should save you another 10% to 20% (could be wrong. Not sure the exact figure). Therefore it is more tax efficient if you paid employer contributions rather than personal contributions... however I do still recommend paying some personal contributions.

[rootsnall]

I currently contribute £500 per month (net) personally to my pension. I was always led to believe that the combination of the lower rate tax relief directly into my pension and higher rate tax relief through my tax return, meant this was as tax efficient as contributing £625 (gross) directly from my company. My accountant is suggesting contributing from the company is more tax efficient. I’m trying to find an example calculation to demonstrate this. Can anyone help.

PS I’ve had a each through the forum and haven’t been able to locate an example calculation on this subject, but if it’s already been discussed please just direct me to the appropriate thread.

The saving made by paying it directly from your Ltd is in NI, approx 20% with employers and employees NI added together.

[QwertyBerty]

>My accountant is suggesting contributing from the company is more tax efficient

True, the saving being the irrecoverable NIC (employee and employer).

QB.

[Lewis]

I currently contribute £500 per month (net) personally to my pension. I was always led to believe that the combination of the lower rate tax relief directly into my pension and higher rate tax relief through my tax return, meant this was as tax efficient as contributing £625 (gross) directly from my company. My accountant is suggesting contributing from the company is more tax efficient. I’m trying to find an example calculation to demonstrate this. Can anyone help.

PS I’ve had a each through the forum and haven’t been able to locate an example calculation on this subject, but if it’s already been discussed please just direct me to the appropriate thread.

It is true that since April this year it is more tax efficient to pay via the company, the calculations have been on a few previous threads. It became more efficient when the corporation tax rates increased this year. The calcs go something like this ... if company makes £1000, if you pay direct from the company, the pension amount will be £1000.

Taking as a dividend instead and paying into pension from personal account it would go like this ...

2008/9 Corporation tax @ 21% = £210
Allows £790 dividend to be paid into pension (£877.78 gross dividend, i.e 790/0.9)
With tax relief = £790 @ 20% = 790/0.80 = £987.5

So you are marginally better off paying via company. This margin will increase next year as corporation tax goes up again.

[ASB]

I currently contribute £500 per month (net) personally to my pension. I was always led to believe that the combination of the lower rate tax relief directly into my pension and higher rate tax relief through my tax return, meant this was as tax efficient as contributing £625 (gross) directly from my company. My accountant is suggesting contributing from the company is more tax efficient. I’m trying to find an example calculation to demonstrate this. Can anyone help.

PS I’ve had a each through the forum and haven’t been able to locate an example calculation on this subject, but if it’s already been discussed please just direct me to the appropriate thread.

It has been done to death but the threads may have been deleted. Search and wade through the results. These may help:-

http://forums.contractoruk.com/accou...l-company.html
http://forums.contractoruk.com/accou...h-company.html

Anyway, there is no yes/no answer it depends on circumstances. You state you are a higher rate taxpaper.

If the source of the income is salary then it would normally be most effective for the company to make the pension contribution. Company NI is saved.

If the source of the income is dividend then you are probably slightly ahead of the game if you make personal contributions, though the company will pay CT on the distribution you will end up getting slightly more relief than would be the case if the company made the contribution. Recent changes may have changed this.

If you are IR35 caught then the first option is really the only sensible one available.

[ASB]

It is true that since April this year it is more tax efficient to pay via the company, the calculations have been on a few previous threads. It became more efficient when the corporation tax rates increased this year. The calcs go something like this ... if company makes £1000, if you pay direct from the company, the pension amount will be £1000.

Taking as a dividend instead and paying into pension from personal account it would go like this ...

2008/9 Corporation tax @ 21% = £210
Allows £790 dividend to be paid into pension (£877.78 gross dividend, i.e 790/0.9)
With tax relief = £790 @ 20% = 790/0.80 = £987.5

So you are marginally better off paying via company. This margin will increase next year as corporation tax goes up again.

Yes but the OP is a higher rate taxpayer. Thus there is 25% of the net dividend to be paid as higher rate tax. But this gets relieved in the SA tax calculation and used to (but may not any more) result in a slight advantage.

[I can't be bothered to dummy up a tax return and chuck it into the tax calculation though since it's not my money.]

[AndyK]

Thanks for the replies and links to the previous threads, though there still seems to be some diffference of opinion on this matter In my case my personal contribution comes from dividend earnings, so not subject to NI. I'm also a higher rate tax payer, so recieve higher rate tax relief on my personal contribution. In this case should I continue with contributing personally or start contributing through the company and reduce my dividend payout.

[pmeswani]

Thanks for the replies and links to the previous threads, though there still seems to be some diffference of opinion on this matter In my case my personal contribution comes from dividend earnings, so not subject to NI. I'm also a higher rate tax payer, so recieve higher rate tax relief on my personal contribution. In this case should I continue with contributing personally or start contributing through the company and reduce my dividend payout.

If you have enough "spare" cash without reducing your current Divi payments (i.e. after the CT calculations, VAT, your dividend payments, etc), then put that into your pension. Continue to pay into the pension via your own personal contributions (if you can afford to) and when you come to doing your Self Assessment, you should be able to increase your contributions. My advice is to do both where practically possible without reducing your pay.

[ASB]

Thanks for the replies and links to the previous threads, though there still seems to be some diffference of opinion on this matter In my case my personal contribution comes from dividend earnings, so not subject to NI. I'm also a higher rate tax payer, so recieve higher rate tax relief on my personal contribution. In this case should I continue with contributing personally or start contributing through the company and reduce my dividend payout.

If the company pays 1000 in pension contribution the pension gets 1000.

If it doesn't then you get potentially 790 dividend. However as a higher payer you get to pay 197.50 in higher rate tax on this dividend leaving you a net dividend of 592.5.

Now, if you put 592.5 as a personal contribution into a pension the pension claims relief - but only at basic rate. So the pension gets 592.5 * 100 /80 = £740.63.

However you also get relief through your tax return for eligible contributions. This is where it gets complex. Is the payment made from a dvidend eligible ?

I do not believe it is:-

http://www.direct.gov.uk/en/MoneyTax...ns/DG_10026927

The relevant words are:-

"Limits on tax relief

You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension is subject to an 'annual allowance'."

If you happen to have enough earned income from other sources then you may find that you get slightly more relief this way. But you may not.

You can ask as much as you want for a yes/no answer, but there isn't one. It depends on your circumstances.

What you can do however is to put your projected numbers into some tax return software and try some scenarious. Then you can figure out which is best for you.

From your description of your circumstance it sounds like your best bet is probably to make company contributions.