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Pension contribution question.


Mirror Mirror
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Mirror Mirror

Suppose I run my own business and pay myself less than the personal allowance 1 year, say £5000 (and live off that and savings), and pay more than the annual allowance into my pension, say £45000.

Do I pay tax on the AA exceedance (£5000) at the basic rate or can the personal allowance be applied to the AA exceedance, just as it would with income, thus making the AA exceedance tax free?

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Frank Hovis

As nobody else has replied I'll have a go but big caveat that I am really only talking about transferring what I know from PAYE.

To me that reads that you are paying yourself £50k and then putting £45k into a pension which is £5k above the £40k annual allowance (assuming none brought forward that you can use).

You are separately taxed on that £5k rather than it going into your income pool for the year and therefore you can't then simply set it against your unused £7.5k of the £12.5k personal allowance.

Purely my opinion.

There are calculators at the link to work the numbers.

https://www.gov.uk/guidance/who-must-pay-the-pensions-annual-allowance-tax-charge

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Mirror Mirror

Thanks Frank. That’s kind of what I suspected, although I have heard that the 2,are lumped together in certain circumstances.

Ill run some numbers through the calculator and see what I get.

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  • 2 weeks later...

I was under the impression that in a limited company, for a company director, pension contributions were capped at the lower of either £40k or the salary you are paid. So you’d only be able to put £5k in a pension if you only paid yourself a £5k salary.

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Democorruptcy
8 hours ago, Castlevania said:

I was under the impression that in a limited company, for a company director, pension contributions were capped at the lower of either £40k or the salary you are paid. So you’d only be able to put £5k in a pension if you only paid yourself a £5k salary.

Pension contributions aren't capped just the amount that qualifies for tax relief. At 100% of salary up to £40k.

What about paying directly into your pension for corporation tax/NIC purposes?

Quote

 

Your limited company can contribute pre-taxed company income to your pension. Because an employer contribution counts as an allowable business expense, your company receives tax relief against corporation tax, so the company could save up to 25% in corporation tax.

Your employer pension contributions must abide by the rules for allowable deductions. The rules state that the pension contributions should be ‘wholly and exclusively’ for the purposes of business. To figure out whether this is the case, HMRC looks for certain evidence, for example whether other employees are receiving comparable remuneration packages.

Another benefit is that employers don’t have to pay National Insurance on pension contributions. The National Insurance rate for 2021/22 is 13.8%, so by contributing directly into your pension rather than paying the equivalent in salary, you save up to 13.8%.

This means that in total, your company can save up to 38.8% by paying money directly into your pension rather than paying money in the form of a salary. Depending on your circumstances, this may or may not be more beneficial to you than paying personal pension contributions.

https://www.pensionbee.com/pensions-explained/pension-contributions/contributing-to-your-pension-from-your-limited-company

 

 

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14 hours ago, Castlevania said:

I was under the impression that in a limited company, for a company director, pension contributions were capped at the lower of either £40k or the salary you are paid. So you’d only be able to put £5k in a pension if you only paid yourself a £5k salary.

It depends. If you pay yourself a £5k gross salary, then your personal pension contributions are capped at £5k. 

The way you can get around it is the company/employer contributions which are only limited by the £40k allowance (plus your roll forward allowances). 

I'm currently salary sacrifice so my employer pays all my contribution.

 

 

Edited by Albo
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