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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15946
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I run my own (one man) company, and am taking my government

Resolved Question:

I run my own (one man) company, and am taking my government pension. Rather than taking a salary I would like to put money into my SIPP and also utilize unused allowances for this year and the 3 previous tax years. How is my tax band worked out if I'm not actually taking a salary as I would also like to make my own personal contributions to the SIPP and get 40% tax allowance on these. Do I need to pay my self enough to get in the 40% tax band in the first pace?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi. Regardless of whether you have any unused annual allowance from earlier tax years in addition to the annual allowance for the current tax year, you cannot get tax relief on a gross pension contribution greater than your salary for the tax year in which you intend to make the contribution unless you contribute to a stakeholder pension for which no earnings are necessarily required. So, unless you have earnings in the tax year, you won't get tax relief for contributions to a regular pension plan. Your income would need to be greater than £42,385 in the current tax year to achieve tax relief at 40%. I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.
Hi Tony,
Thank you for your earlier reply.
Let me give you some more information.
I read that as a director I could put all of my salary into my SIPP and that my company could also contribute what ever it wanted to my SIPP. Basically I want to put as much in my SIPP taking advantage of as much tax allowance as I can while keeping Employers NI contributions to a minimum and my own tax to a minimum (I don't pay NI as I am over 65)
I would like to maximize my contributions into my SIPP, which I haven't made any contributions to, in this tax year or the 3 previous tax years, to use up the allowance for £40,000 2015-6, £40,000 2014-5, £50,000 2013-4 and £50,000 2012-3.
As an employer I could pay £100,00 as a salary, or as pension contributions or a combination of both. I could also contribute from personal savings up to £100,000 in total into my SIPP. Ideally I would like to use up as much of my SIPP allowance as possible over the next 2 years, retire and then take a draw down pension at a level that stays within the 20% tax band. What is the optimum way of achieving this using employer SIPP contributions, taking a salary and paying that salary in to the SIPP and using up to £100,000 of personal contributions into my SIPP?
Expert:  TonyTax replied 2 years ago.
I cannot give you financial advice, just tell you what the tax implications are for employee contributions, employee salary sacrifice contributions and employer contributions.
If you take a £100,000 salary, your employer will be subject to employer NIC at 13.8% notwithstanding the fact that you are over 65 on earnings over £8,112 (£12,680.54).
On a £100,000 salary and ignoring your state pension, you would pay income tax of £29,403. You would clearly get tax relief at 40% on a large amount of a £100,000 gross personal pension contribution but the employer NIC would eat into that. You say you have unused annual allowance from earlier years so it would appear you could do it.
As I said earlier, as an individual you are limited to getting tax relief on 100% of your earnings in any one tax year.
Your company can pay contributions in excess of your salary which will not be taxed on you and get 20% corporation tax relief (£20,000 on a £100,000 contribution) and it can use your accumulated unused annual allowances to cover a company contribution. As you will read here, a company contribution must be made "wholly and exclusively" for business purposes to qualify for tax relief:
http://adviser.royallondon.com/technical-central/information-guidance/contributions-and-tax-relief/pension-contributions-the-basics/
http://adviser.royallondon.com/technical-central/information-guidance/contributions-and-tax-relief/employer-contributions-and-tax-relief/
If contributions exceed the accumulated unused annual allowances, an annual allowance charge will be levied on you at whatever tax rate you pay tax at.
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