Employer and Employee Pension contribution - the difference

[skray]

Hi,
I am a contractor and operate through a personal services company. I am the sole owner of the company. I raise invoice for services and my client pays into my business bank account, out of which I pay myself a salary and from time time dividends. Most of my funds are held in my business bank account.

I think I have the option either to pay into a pension fund directly out of my business bank account (effectively fully Employer's contribution), or first draw the money into my personal bank account (as salary and dividend) and then pay into a a pension fund (.e.g. SIPP).

In the latter case (paying out of personal bank account), I may have to income tax/NI on salary/dividend when I draw the money. But pension contribution is effectively tax free (as pension contribution is topped up by 20%, and additionally for higher rate tax payers, additional 20% can be claimed back in SA tax return). There is however a limit of 40K per year.

Is there any such limit when I am investing into a pension out of my business bank account. e.g. Pension contribution is exempted from Corporation Tax - but can I pay my entire profit for the year and pay no corporation tax all. Or is there any tax (e.g. fringe benefit tax) that I as the beneficiary will have to pay. Does the pension contribution gets topped up by 20%. Assuming I am a higher rate tax payer which option is better.

Thanks
Sanjay

[robbob]

Is there any such limit when I am investing into a pension out of my business bank account. e.g. Pension contribution is exempted from Corporation Tax - but can I pay my entire profit for the year and pay no corporation tax all. Or is there any tax (e.g. fringe benefit tax) that I as the beneficiary will have to pay. Does the pension contribution gets topped up by 20%. Assuming I am a higher rate tax payer which option is better.

Warning you should always take specific advise from an IFA with regard to limits with regard to pension restrictions etc - generally speaking is a dangerous game when it comes to pensions.

Generally speaking from a tax perspective - amounts below the 40k annual limit where you don't exceed the income cap limit (150k) will normally be fine - a company contribution into your SIPP/pension is generally the most tax efficient overall route - presuming the alternative method is for you to pay personally into the pension after taking a dividend on which you would be paying the 7.5% dividend tax charge. I guess for lower earners with no personal divi tax due paying privately would be fine - slightly better off for them with the corp tax rate being 19%.

Note employer contributions are only ok for a corporation tax deduction if they are reasonable form a commercial point of view compared to a similar reasonable salary for duties done - this shouldnt be an issue if you as the main company earner but could be an issue for family members - that may fail the

"wholly and exclusively for the purposes of the employer's trade or profession "

for some reason the pension advisory service employees are remarkably untrained in this area and have been know to give advise that is not the full picture - unless fully pushed on the subject.


finally one other point of note - with company payments you don't have the problem that contributions may exceed 100% of earned income - so even if you didn't need to extract money from the company to pay into the pension personally you could still run into troubles if you had low salary wanted to make high contributions personally.

[AnthonyR]

Just to add to robbob's post, one thing to note, which catches people out from time to time is that your tax relief on personal pension contributions is limited to your Net Relevant Earnings, which does not include dividends or rental income, only PAYE and trading income. So if you paid yourself a nice big dividend to then contribute into a SIPP you may not be able to claim any tax relief on that contribution as HMRC ignores the dividend when looking at whether you have enough earned income to justify the tax relief.

Generally, company contribution just makes life easier!

[skray]

Thanks robbob AnthonyR