Pension rules, can someone explain please?

[LizzieSiddal]

Our company has made a chunk of money this year, and we think we want to put it all into a pension, as we have been very negligent in this area in the past. (We are 52)

I understand the limit is 40,000 per year but the govt, would pay 40% of that. So does that mean we physically put 24,000 into a pension and the govt put in the rest?

The second question is, I understand you can use up your pension allowance, backdated for 3 years. Dh can do this as he has a tiny pension with the NFU, which he has always paid into. Will he have to use the NFU to use up his allowance or can he choose a new provider?

Many thanks!

You are right , assuming you are both higher tax rate payers and earn over £40k a year - if you top this year up to your maximum, you can then backfill the gaps over last 3 years. You should talk to pension wise as they have a free service to advise

If the company is making the contribution it pays gross and gets tax relief through its corporation tax deduction.

You can utilise previous years unused contributions if you had a pension scheme in force - you don't have to make the contributions to that scheme.

The annual allowance (the £40k limit) relates to all the contributions that go into your fund, whatever their source. So the total that can go in before tax is paid is £40k including the tax relief (the bit the government contributes). You can put in more than £40k but you may pay tax on the rest.

However, as you say you can use up unused allowance from the previous 3 years, if you were a member of a pension scheme during those years. So if your DH only paid in (say) £5k last year, he will have £35k allowance he can carry forward to this year. The carry forward can be used with any provider, doesn’t have to be the existing provider.

This is all done on an individual basis, so you can each pay in £40k into your separate pension pots.

However - the annual allowance gets reduced if your taxable income is above £110,000 and more than £150,000 when your pension growth is added on. Don’t know if this affects you but worth taking advice. The annual allowance can be as low as £10k in worst case scenario.

Oh thanks, both of you!

Chasing I didn’t resale’s that about the company. Would be have to set up a pension scheme (we will be doing that soon anyway as we are going to be employing other people) or can the company contribute to another scheme?

We are actually booked in to see an IFA on Tuesday, but in my initial discussion he seems keen to explore other options other than pensions. Because of the tax benefits, Dh and I are very keen to stick to pensions.

Thanks Chessie, no we haven’t earned over £110,000 each (unfortunately )

hang on - you're company directors.

First is the question of whether you put it in or the company puts it in (generally better for the company to do it rather than pay you a dividend with that money)

But if you put say £40k into your pension the government doesn't then give you £16k. You just don't pay tax on that £40k when you do your self assessment. You will still have £40k in your pension, NOT £56k

Thabks User, yes we have no intention of taking the money out first as dividends, it would go straight into a pension from the company.

And yes I do realise it’s a total of 40,000 once the govt add their bit. I just wasn’t sure if we put in 40,000 and the giver have it back, or we put in 24,000 only.

£40k is the annual allowance for this tax year. 'This is the maximum you can pay in tax free. If you go over this then you pay a tax charge. You can use carry forward from the past 3 tax years if you haven't paid the maximum in each year for those years. 2015/16 was a transitional year so is a little different with regards limits etc so be careful.

Your DH needs to work out what his pension growth was for the last 3 years (the contributions paid into the NFU scheme by him or on his behalf) to work out how much carry forward he has. He can then put £40k plus the carry forward amount into his pension this year and not pay any tax. You don’t mention your pension so it sounds like you haven’t been a member of a pension scheme before? If that’s the case there’s no carry forward for you and you can therefore only put in £40k.

Sorry - you can put in more than £40k but would pay tax on anything above that.

Chessie I was a member of a teachers pension scheme but haven’t paid into it since 1991, as I left teaching. So no contributions since then.

The rules just say that to use carry forward you just have to be ‘a member’ of a pension scheme, but that’s not defined so arguably it doesn’t have to mean an active member. You are a deferred member of the Teachers’ Pension Scheme and therefore should have the full carry forward for the last 3 years to use, so could probably put in up £160k this year and not pay tax on it. Check this with your advisor though.

Oh that sounds good! Thanks for all the advice, I feel I’m more prepared for this meeting now.

Just one more query. The IFA has said we will have an initial meeting without charge then if we decide to go ahead, he will charge us. Does that mean we can expect him to give us detailed, specifically to us advice about schemes etc, or will it be more general type of advice?

Another thing to bear in mind with company contributions is that the company get a tax relief in the accounting period in which the pension contribution is actually paid - you can't just accrue it in the year end accounts and get the tax relief.
So if you have just passed your year end and are considering the contribution now you don't get the relief against the company tax until the current year.
Depending on the timing it might to worthwhile from a cash flow basis considering extending your company year end to encompass the pension contribution.
The company can make pension contributions to any scheme (it is very unlikely that you will be setting up a company scheme as such, you will be setting up individual defined contribution schemes for each employee with a provider under your company banner).

Company contribution = gross amount (ie the £40k).
Tax relief then given against company profits at company tax rate, bear in mind this is now

Sorry I misread the both about the IFA, I would expect the initial meeting to be basic information fact gathering with not a lot of advice - if you want to proceed they will then prepare the advice and charge you for it.

Thanks Squirrels, our end of year is June, so that works out well.

Your language is confusing. The government doesn't "add their bit". You do realise that right?? If your company makes a contribution for you of say £10k then the only effect is that it is tax deductible for corporation tax.

You don't get any extra added to your pension from the government.
You don't get any personal tax relief (because it isn't your personal contribution)

But likewise you are not now having to take that £10k out as a dividend and so there is effectively a further tax saving there.

Your pension pot will now have £10k sat in it.

If you want your pension to have an extra £40k in it then the company makes a contribution of £40k out of the company bank account directly into your pension. The government doesn't add anything. Your company then pays less corporation tax. It doesn't affect your income tax (unless you go over your allowance).

Thanks user That is what I wanted clarification on, because many articles I have read mention a figure of 24,000, if you’re a higher rate tax payer. I am obviously missunderstanding it.

Company contributions attract tax relief on a different way to personal contributions.

For a personal contribution you pay the 80% net, e.g. £8,000.
The pension provider claims the 20% tax from HMRC to give a gross contribution into your fund of £10,000.
If you are a higher rate tax payer you basic rate tax band is then increased by the gross payment of £10,000 so that you gain the additional tax relief.

Company contributions reduce the company profits, thereby reducing the corporation tax payable.

Your DH needs to work out what his pension growth was for the last 3 years

Not growth, just contributions.

Your membership of the teachers pension definitely qualifies you to carry forward. Membership is all that's needed.

dont it’s contributions in a defined contribution scheme, but growth in a defined benefit scheme, so will depend which type he’s been in. Probably DC but can’t be absolutely sure from the info OP gave.

NFU is a mutual provider so I'm pretty sure. But yes indeed if there is any DB the 'contributions' are calculated by the increase in benefit. I would still not call it 'growth' though, it's still an assessment of contributions, but the basis of calculation is different. but now I'm being a pedantic arse

In a dB scheme it is the accrual over the year that counts for annual allowance using a factor of 16 and a cpi figure