As a Limited Company contractor you may pay into a pension in order to lower your overall tax liability, but are you aware of how the payment is made, who the contract is between and the implications this can have on how the tax relief is obtained? Is your pension being treated correctly?
Employer’s Pension Contribution
You should inform your pension provider in writing, that your pension contribution is in fact an Employer contribution and that it is being made gross. As the contract is between the Employer and your chosen pension company, payments should therefore be made direct from the Employer’s bank account (your Limited Company’s business bank account).
For example, a contribution of £800 will increase your pension pot by £800.
Employer’s contributions are deductible expenses for Corporation Tax purposes, meaning the company’s profits are reduced by the value of the contributions and the company pays less tax as a result.
Remember! Employer contributions are a deductible expense for IR35 deemed salary calculations, which can reduce the tax due by a large amount (which is great news!).
Your Personal Pension Contribution
If you personally pay into a pension, then none of it will go near your Limited Company. You’ll personally pay your pension provider a net amount and your provider will then claim 20% for tax from HMRC.
For example, a contribution of £800 will increase your pension pot by £1,000.
Personal contributions also increase your basic rate taxband, meaning you can earn more money before you cross over into higher tax rates. If you make a pension contribution of £800, your basic rate taxband will increase from £32,000 to £33,000, so you will pay a lower rate of tax on that portion of income.
However, if you’re not a higher rate taxpayer then this relief will be wasted. It could be more beneficial to make Employer contributions direct from your company, or increase your personal income to take full advantage of the relief. Speak to your Personal Accountant to understand which route is the most beneficial one to take for you and your circumstances. It’s a delicate balancing act when taking an additional dividend to pay into your pension, so make sure your contractor accountant completes the calculations on your behalf.
Are you paying net or gross, as an employer or an employee?
Your pension provider will be able to give you this information. If your payments are treated as net but are paid through your Limited Company, then you’re getting tax relief twice which will arouse suspicion from HMRC and could result in an unexpected tax bill.
Remember! The overall limit for your pension contributions is £40,000 (for tax years 2015-16 and 2016-17), which includes both payments made by you personally and by your employer.
Got questions about your pension? Speak to your dedicated Personal Accountant for tailored advice that’s unique to your needs as a Limited Company contractor.
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.