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what about tax and a personal pension

Pensions, net or gross

Pensions, net or gross

Contractors often pay into a pension as a way to lower their overall tax liability, but many do not understand that the way the payment is made, and who the contract is between, has implications on how the tax relief is obtained.  We advise checking to ensure yours is being treated correctly.

Employer Contribution

The pension provider should be informed, in writing, that the contribution is an Employer contribution and that it is being made gross.  The contract will be in place between the Employer and the Pension Company, and payments should be made direct from the Employer’s bank account.

A contribution of £800 increases your pension pot by £800.

An Employer contribution is a tax deductible expense for Corporation Tax purposes, meaning the company profits are reduced by the value of the contributions and the company pays less tax as a result.

Employer contributions are also a deductible expense for IR35 deemed salary calculations, which can come in exceptionally handy, and reduce the tax due by a large amount.

Personal Contribution

If you pay into a pension personally then nothing goes near your Limited Company at all.  You personally pay the pension provider a net amount, and the pension provider then reclaims 20% tax from HMRC.

A contribution of £800 increases your pension pot by £1,000.

Personal contributions also increase your basic rate tax band, meaning you can earn more money before you cross into higher rates.  A pension contribution of £800 will increase your basic rate tax band from £31,865 to £32,865, so you’ll pay a lower rate of tax on that portion of income.  This is useful if you’re a higher rate taxpayer.  If you’re not then this relief will be wasted, and you should consider whether you would be better off making Employer contributions direct from your company or increasing your personal income to take full advantage of the relief.  There is a delicate balancing act to taking an extra dividend to pay into your pension – ask your contractor accountant if you’re not sure of your calculations.

Are you paying net or gross?  As an employee or an employer?

Check with your Pension provider.  If your payments are being treated as net but are being paid through your company then you’re getting tax relief twice and could be in for an unexpected tax bill if HMRC realise.

You should also keep in the mind that the overall limit for your pension contributions, which has just dropped to £40,000 for 2014/15,  covers both those made personally and those made by your employer.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.