QUESTION: I own a limited company of which I am a director. My new year’s resolution next year will be to set up a pension. Should I set up a personal pension or have my company make an employers contribution into a pension scheme on my behalf?
ANSWER: Most people don’t realise you can actually contribute as much as you want into a pension scheme, though not all your contribution may receive tax relief.
There is a default amount of £3,600 or 100 per cent of your relevant earnings up to the current annual pension allowance amount of £40,000 gross. As you are a company director and shareholder you are possibly remunerating yourself via a combination of salary and dividend and it is important to realise that relevant earnings do not include dividend income and therefore if you are considering embarking upon a regular pension contribution strategy you should revisit your total remuneration package before embarking on such a plan.
Assuming however you do have relevant earnings in a tax year of £40,000 or more you will be able to make a maximum gross pension contribution of £40,000. In reality however, you write a cheque for 80 per cent of the contribution (£32,000) and the government tops up the fund with the 20 per cent tax credit (£8,000).
If you are going to have your employer company make a contribution on your behalf there is no restriction on the amount of employer pension contribution. However, the whole payment may not receive tax relief and you need to bear in mind that the £40,000 limit includes both your own and your employers contribution and if this limit is breached the excess over £40,000 is taxed at your highest rate of tax (potentially 45 per cent).
If you already have a small pension scheme, no matter how small, you will be able to access your unused relief which is the amount below the annual allowance amount that you have previously not contributed in the three previous years.
This would enable you to make a very substantial pension contribution in the current year up to as much as £160,000 without breaching limits with this amount either payable by yourself or a combination of yourself and your employer. You would require relevant earnings of at least £160,000 to obtain tax relief however.
A further problem arises however due to the tapered annual allowance rules which states that if you have adjusted income over £150,000 your contributions are restricted by the tapered annual allowance. You will only be affected by the tapered annual allowance if your adjusted income is greater than £150,000 and your threshold income is over £110,000.
Threshold income excludes all pension contributions whereas adjusted income includes all pension contributions. For every £2 of income over £150,000 of threshold income your annual pension allowance is reduced by £1 and the maximum reduction is £30,000 meaning that your annual allowance is £10,000 for anyone with adjusted income of £210,000 or more.
If your threshold income is less than £110,000 you will not be affected by this tapering of the pension allowance.
As you can see from the above, the current UK pension contribution legislation is extremely complex, and I would urge you to seek professional advice long before you decide your contribution level.
:: Paddy Harty (p.harty@pkffpm.com) is senior director at PKF-FPM (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
