There are many ways in which we can advise you on making the most of your income and minimising the tax you pay. Using your pension contributions wisely can make a positive impact on your finances, as long as you are aware of a few considerations.
Pension contributions are eligible for tax relief at the rate you pay tax – 20%, 40% or 45%. This makes them a tax-efficient way of saving as you can receive tax relief regardless of whether you pay tax or not. The maximum amount on which a non-taxpayer can currently receive basic rate tax relief is £3,600. So an individual can pay in £2,880 a year, but £3,600 will be the amount actually invested by the pension provider.
The total amount of tax relief available on pension contributions is calculated with reference to ‘relevant UK earnings’. Beware here as dividends do not count for pension contributions purposes. So if you take a small salary and a large dividend, your pension tax relief limit may be restricted. Importantly, tax charges will apply if the limit is exceeded.
Your options here would be to increase your salary and reduce your dividend or make the contribution directly from your business as an employer contribution. The latter also qualifies as an allowable business expense, so the company could also save corporation tax.
To qualify for a deduction, the pension contributions need to be ‘wholly and exclusively’ for the purposes of business. The kinds of checks carried out by HMRC would be to see if other employees are receiving comparable contributions.
Another advantage of making a company contribution is that employer National Insurance Contributions will not be payable, saving the company up to 13.8% on the contribution amount. This means that the company can potentially save up to 32.8% by paying money directly into your pension rather than paying money in the form of a salary. Depending on circumstances, this may or may not be more beneficial than paying personal pension contributions.
Talk to us for clarification.