House or pension?

[wonderwish]

I am a business owner and have some dividends due this year.

I currently don't have a pension running, as I have been reinvesting into my business. I have a few years from civil service, but not much.

This year I'll be able to take £50k from my business. I am about to purchase a house (with separate finances).

Would you spend the £50k on paying more off the mortgage, a separate investment or put some into a pension?

Pension is usually the most tax efficient thing to do but obviously that depends on your other business arrangements and your income etc - do you have an accountant to advise?

Whether it makes sense to pay it into the mortgage also depends on what your interest rate is, if putting in the £50k tips you into a lower loan-to-value range and therefore gets you a much better interest rate then it could be worth it...

A larger deposit may give you access to a better mortgage rate.
How old are you ? How long can you lock it away for. Pension may be tied up until 55 or 57/58 are you a higher rate tax payer do you claim Child benefit?
You can open an isa now for £20k and another on the 6 April for 20k.
Do you have an emergency fund?

Pension as you get minimum 20% government topup.

Pension, especially as you have hardly any pension at the moment.

Not too sure but you’ll still get taxed again on your pension when you take it out so in some ways it really is better to keep savings in a ISA then when you retire you can use them free of tax!

Or pump your money into a super expensive house then downsize one you retire and also keep your profits

Pension if you haven't got one yet for sure.

Thanks all, interesting!

I am 40. My DH and I will both be drawing a further £50k in total (from April). This will be in part a lump sum dividend and paid wages.

Our house deposit is from separate funds. The mortgage rate hasn't been agreed yet. An extra £20k would tip it into the 20% LTV, however, I don't think we will be taking the second £50k till later in the year, so I haven't considered it as part of our house purchase.

We do have a business accountant, but she tends not to think outside the box in terms of our personal finances.

You can‘t actually use dividends to pay into your pension, however, if you have normal wages, you can put all of those subject to the annual limit.
The company could make pension contributions in a tax efficient manner.

There are pros and cons both ways but on a practical basis given that you’re house buying now then I would add it to the deposit as it will reduce the total interest substantially - lump sum mortgage payments often attract fees if made later on.

Annual pension contributions are limited to 40k (or to the amount of your salary if lower) so it would be worth trying to do 40k per annum each year going forward if the business is doing well. You can use allowance for the three? previous years.

If you pay yourself a wage then it’s worth thinking about doing pension deductions from salary as that’s more tax efficient.

If you are the director of a limited company, it’s usually more tax efficient to pay straight into a pension, as you don’t pay corporation tax on contributions.
It would mean taking a lower salary/dividends which may affect how much you are able to borrow on a mortgage.
Can you do the sums? Eg if your deposit is £20k higher, you save money in mortgage interest, but would pay more tax (both corporation and income tax). Also remember that money invested in a pension should grow over time.

What is your annual income, op?

You can only put upto £40k into a pension each year - and that includes the tax relief, so £32k in reality (hmrc adds £8k).

If you don’t pay yourself a salary then you can only pay in £2280 (hmrc adds £720 to make it £3600).

You can only use allowance from previous years if the pension was already in place in those previous years, so that’s not an option this year either.

“You can only put upto £40k into a pension each year - and that includes the tax relief, so £32k in reality (hmrc adds £8k).”

This isn’t true otherwise the limit would only be £24k for higher rate tax payers. Limit is £40k contributions unless you have a tapered allowance.

It is true. It's the gross contributions that are counted for this, not the net.

Most PAYE people pay into pensions through salary sacrifice, so the number they see deducted on their payslip is the gross number.

Also, higher rate tax payers would still pay £32k (of taxed income, not salary sacrifice) into a SIPP. HMRC would pay £8k into the SIPP and the remaining 20% tax relief would be obtained through self assessment & a repayment, or by HMRC changing your tax code.

But it’s still £40k gross though? Eg employee earns 150k- employer pays 15k or 10% and employe puts in £25 to take it up to the £40k limit. It doesn’t cost them £25k in reality because of the tax so more like £15k. I guess it’s just semantics but it messes with my head to think about net rather than gross.

Yes hut if you're paying into a SIPP out of your (already taxed) income, you can only put £32k in in reality. Which is exactly what the poster that you disagreed with said.

And rhe example you gave is salary sacrifice via PAYE, which is totally different.

Disclaimer first of all that I am not qualified to give advice in this!

But from talking to a relative who is, he said he would never pay off a mortgage (especially if you have a decent rate), and pensions do not usually give good returns, especially if you don't have an employer contribution.

Depends how safe you want to play it and whether you want to put time and effort into learning how to invest. If you inform yourself and invest it wisely, your money will do a lot better being invested than it would in your mortgage or pension.

There's a book called 'How to own the world' by Andrew Craig which might be worth a read before you decide. I'm reading it now and it's very accessible and informative.

pensions do not usually give good returns

This is utter garbage.

You can invest the funds in a SIPP (which is what the OP would be opening in their position) in any funds or shares/bonds that you choose, and those investment are no more or less likely to do badly than an investment that isn't in a SIPP.

You're talking about "investing" and "pensions" as if they are two different things, but when you are using a SIPP they are not.

Don't forget to factor in tax due on the dividend withdrawal - if this is your only income it shouldn't be huge but if you both have other earnings that take you to higher rate could be fairly hefty.

If you want to make pension contributions this is potentially more efficiently done direct from the limited co, however it does depend on your circumstances and there are limits so best to chat with your accountant on this.

House, as you can get at your money when you want/need it.

@LookingOldTheseDays i realise I was wrong- just had a slight panic we’d messed up on annual allowance. Sorry for derailing the post OP.

@wonderwish you aren’t allowed to pay dividends into a pension because you would be receiving 20/40% income tax relief but not paying income tax because you pay the dividend tax rate of 8.75/33.75%. You can only pay contributions from employment, self-employment, furnished holiday let and royalty income. The full list is found at Section 189(2)-(7) Finance Act 2004.

if you pay the contribution out of the company it classifies as employment income, it is tax deductible for the company in the year you put it in. If your profits are likely to be more than £50k (which it sounds like) you may be better waiting to after April 2023 because you will be in the marginal tax band and get relief at an effective rate of 26.5% on some of it.

A pension should give you more in the long run, pensions aim to grow at c5-7% after fees, your mortgage is likely to be less than this, and because your mortgage is after tax you are also getting compound interest on your tax relief in a pension.

I would suggest that if your accountant can’t give you the tax advice on a simple query like this you should be swapping, it is a query I answer on an almost daily basis. Are they a firm of chartered accountants? The wrong advice can be very costly and whilst a qualified accountant will be more expensive they generally will be better.