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.

Top Tax Tips: Claiming pension from the company

Top Tax Tips: Claiming pension from the company

When it comes to tax savings contractor accountants will always recommend you take full advantage of all tax breaks available to you and your contractor limited company. One useful area for possible tax savings is claiming pension contributions directly from your company, rather than paying from your personal income.  Many contractor limited companies have just one employee who is a director operating under a contract of office, rather than a contract of employment, so will be exempt from the rules of compulsory employer pension contributions that apply to larger companies. However, paying pension contributions through your company can be very beneficial as part of your overall tax planning. It can help you make the most of tax allowances applicable to both you and the company and help you grow your pension fund value for the future.

Tax advantages of claiming pension from your company

To qualify for tax relief, company pension contributions must be made for genuine employees of the business. As most contractors are directors of their own contractor company they will legitimately qualify for this relief. Exact savings will of course vary depending on the level of contribution you make through your company, but you can potentially save tax in the following ways:

  • Employer pension contributions are as an allowable expense for Corporation Tax purposes, thus they reduce your company tax liability by £200 for every £1,000 contributed (assuming the company pays corporation tax at 20%).
  • Pension contributions are not a benefit in kind, so there is no tax or NI implications provided the limits are not exceeded (see below).
  • If you are within IR35 then pension contributions are allowable against your deemed salary, thus reducing the amount you need to take as wages.

Pension savings tax relief limits – Annual Allowance and Lifetime Allowance

To qualify for tax relief the total amount of your pension savings must not exceed the Annual Allowance limit in any tax year, so you or your contractor accountants may need to keep an eye on this. For the 2013-14 tax year the limit is £50,000 but this will decrease to £40,000 on 6 April 2014. HMRC allows you to carry forward any unused allowance from the three previous years before the current tax year, so with good tax planning you could avoid going over the allowance even if your current tax year’s pension savings exceed the limit. If your total savings do exceed your Annual and unused allowance, tax will be payable on the excess amount. There is also a Lifetime Allowance limit for pension savings. This is currently £1.5 million but will decrease to £1.25 million from 6 April 2014. These are unlikely to affect the majority of taxpayers, but again, if savings are over this limit a tax charge will apply to the excess. The most tax efficient pension contribution option for you and your company will depend on your individual circumstances and the details of the pension policy itself. If you have specific queries regarding the tax advantages of claiming pension through your company contact your contactor accountant for guidance. At Intouch we specialise in providing user friendly online accounting for contractors with limited companies. All our clients benefit from the knowledge and advice of our experienced contractor accountants which helps ensure they achieve maximum net yield from their contractor income.  Contact us to find out more about how we can help make your contractor accounting easier.

 

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.