Higher tax rate - is contributing towards my pension a good idea to lower it? Ltd Director

[User_Name_2]

Hi Everyone,

My first post here!

I am a one man band Ltd Director in construction. Since all my accounts are dead simple, I decided to stop using an accountant few years ago, and have been doing it myself since. No issues so far until this year.

Now this year, since it is the first time I will fall into a Higher Tax rate on my Self Assessment, I am looking for a way to lower it. I was thinking that it might be a good idea to contribute towards my pension?

If I can do this, I think the best way would be to do this via my Ltd Company, I would let’s say contribute £3000, that would lower company profit and dividend that I can pay myself, which would lower my higher tax rate on SA, as I understand I can claim it as my expense?

If what I wrote is correct, how can I contribute it? I was always paying myself the minimum salary, so have never had to pay any NI but was still getting the minimum state pension. Do I pay that £3000 to HMRC via some contribution site?

I hope what I wrote makes sense!

Regards

Mike

 

[GLAbusiness]

A few bells ringing here.

1. If you want to avoid higher rate tax on your PERSONAL income simply reduce to combination of salary and dividend you take

2. I you want the LTD to pay into a pension you can put in up to £60,000. You do not pay this to HMRC but to the pension provider. You may want to talk to an IFA to arrange this.

3. The company pension contribution reduces you LTD Company profit so reduces the company CT bill. Not your personal tax.

4. Have you bee running a PAYE scheme to report your salary payments.

 

[User_Name_2]

A few bells ringing here.

1. If you want to avoid higher rate tax on your PERSONAL income simply reduce to combination of salary and dividend you take - But if I don't withdraw 100% of my dividend, then what can I do with the amount that stays on the Ltd Business Account? I know I can transfer it to the next tax year, but then at the end of the tax year, I will be in the same situation again + that few k from the current year.

2. I you want the LTD to pay into a pension you can put in up to £60,000. You do not pay this to HMRC but to the pension provider. You may want to talk to an IFA to arrange this. - So HMRC provides only the state pension? And everything above that is the pension provider? Does it mean that paying lets say £20000 as salary instead of £9100 doesn't give me any benefit towards the state pension?

3. The company pension contribution reduces you LTD Company profit so reduces the company CT bill. Not your personal tax. - I know, but if the company profit is reduced, it is going to reduce the dividend I can withdraw. So basically then I would lower the amount I have got under Higher Tax and spend it on my pension instead via the company. That was my plan at least.

4. Have you bee running a PAYE scheme to report your salary payments. - Yes, every month via Basic PAYE Tools app.

 

[Tables Force]

Hi Everyone,

My first post here!

I am a one man band Ltd Director in construction. Since all my accounts are dead simple, I decided to stop using an accountant few years ago, and have been doing it myself since. No issues so far until this year.

Now this year, since it is the first time I will fall into a Higher Tax rate on my Self Assessment.

If I can do this, I think the best way would be to do this via my Ltd Company, I would let’s say contribute £3000, that would lower company profit and dividend that I can pay myself, which would lower my higher tax rate on SA, as I understand I can claim it as my expense?

If what I wrote is correct, how can I contribute it? I was always paying myself the minimum salary, so have never had to pay any NI but was still getting the minimum state pension. Do I pay that £3000 to HMRC via some contribution site?

How do you fall into the Higher Rate if you are only taking a minimum salary?

 

[User_Name_2]

How do you fall into the Higher Rate if you are only taking a minimum salary?

Because along with minimum salary, you get dividends too.

 

[Tables Force]

Because along with minimum salary, you get dividends too.

As @GLAbusiness has said, just take less dividends.

--
Not the question asked, but are you sure that the combination of a 'minimum salary' along with dividends is the most tax efficient route?

 

[User_Name_2]

As @GLAbusiness has said, just take less dividends.

--
Not the question asked, but are you sure that the combination of a 'minimum salary' along with dividends is the most tax efficient route?

It used to be but this year theoretically £12570 Salary instead of £9100 is a better option, but only slightly and it requires to pay NI every month, so just another hassle that would save me maybe £150 a year. Other than that, low salary + dividend is the best option.

BTW. I think I am going to setup a Vanguard Personal Pension account. I am going to pay £4000 towards my pension via my LTD Company, which will lower the CT and Dividend, so my Higher Tax would be around £800 instead of £2000. On top of that, it's time to start saving towards my pension anyway.

 

[GLAbusiness]

I don't understand why you are fixated on taking all the profit as a dividend every year. If there is money in the company when you come to close it then there may be ways to minimise the tax implications.

If you paid more into a pension then you could end up avoiding higher rate tax completely - but only for now.

I suggest that you discuss all the options with an accountant. They are not there just to do the things which you can do yourself. The real benefit comes from when they can advise about all the things which you do not yet know about. It could save you more than it costs.

 

[User_Name_2]

I don't understand why you are fixated on taking all the profit as a dividend every year. If there is money in the company when you come to close it then there may be ways to minimise the tax implications.

If you paid more into a pension then you could end up avoiding higher rate tax completely - but only for now.

I suggest that you discuss all the options with an accountant. They are not there just to do the things which you can do yourself. The real benefit comes from when they can advise about all the things which you do not yet know about. It could save you more than it costs.

It's not that I am fixated, it is the first year when I am in Higher Tax rate, before I could withdraw 100% without any implications to my SA tax. The reason I don't want to keep is because I will most likely be on higher day rate from April, so at the end of the next tax year, I would have to keep even more dividend on my account.

I had bad luck with two accountants before. They were just doing what I am doing now and were never giving me any useful advise. I had to google everything myself. I know, you can say just find a better one, which I will if I won't be able to make my accounts work. For now, I found that pension scheme and I think it's a good idea to set it up, as I need to start saving for my retirement anyway.

 

[WaveJumper]

My suggestion would be based on your comment above, yes you had the wrong accountant so now find another "interview" several until you are confident you have the one who understands your needs any good accountant should be giving you 'proper' tax advice. And my experience tells me they save me more than they charge.

 

[numbersrule]

Hi User_Name_2
You have said you would save £1,200 in personal higher rate tax ( ie your £2,000 minus £800 ) but I believe the Dividend higher rate is 33.75% so £4,000 at that rate would save you £1,350 on the face of it the way you are looking at it.
However, consider the alternative of taking your £4,000 extra Dividend, which would increase your net pay by £2,650 and consider the effect of paying that into your pension and gaining the tax relief. £2,650 grossed up by your pension provider would mean that £3,312.50 would go into your pension and on top of that you could claim higher rate relief as well bringing it nearly up to the £4,000 that your Company would pay in. This means that the only gain is made by your Company in saving on CT of £760. I suppose you could pay that out as an increased Dividend and then pay that as an additional personal pension contribution, so that your pension gains instead of the Company as you seem keen to minimise retained profits.

 

[User_Name_2]

Hi User_Name_2
You have said you would save £1,200 in personal higher rate tax ( ie your £2,000 minus £800 ) but I believe the Dividend higher rate is 33.75% so £4,000 at that rate would save you £1,350 on the face of it the way you are looking at it.

Here is how I worked that out.

Scenario 1 - I pay out that £4000 as dividend:
That means, I get £4000 in higher tax rate - 33.75% bracket - £1350 tax to pay. On top of that, I can't claim it as my company expense obviously, so my CT is £800 higher. Tax to pay = £1350 + £800 = £2150

Scenario 2 - I pay out that £4000 onto my pension scheme via Ltd Company.
That means, I don't get that £4000 in my SA, which means, I lower my higher tax rate by £1350. On top of that, I can claim it as my Ltd Expense, which means I lower my CT by £800.

So in Scenario 2, I "transfer" £1350 + £800 = £2150 from HMRC to my pension fund if my math is correct. Obviously that way I need to add £1850 from my pocket, but I am fine with that, as instead of losing £2150, I can keep £4000.

EDIT:

To top it all up, since I setup my Vanguard pension account 3 days ago, I can see that I already earned £12.78