Dividends and Pension Contributions

In the current tax year ending 5th April 2018 the annual pension contribution limit (known as the Annual Allowance) is £40,000.

For many people, this limit won’t worry them.  And if you want to pay a large amount into your pension scheme, you may be able to use unused allowances from up to three previous years. This is called Carry Forward.

But there is another limit to consider.

If you are the owner of a small or medium sized company has your accountant suggested you take a low salary and higher dividends, to keep your tax down?

Personal pension contributions are capped at the level of your net relevant earnings (NRE).  These are your taxable earnings (such as salary less deductions) but don’t include dividends.

Any personal contribution you make will be limited to your NRE which will probably be less than the Annual Allowance.

The answer may be for your company to pay the pension contribution.

You see, Employer contributions aren’t limited by your NRE.

So can pay up to the annual allowance plus the carried forward unused allowance if required.

And, the pension contribution is usually a tax allowable deduction that you can claim against corporation tax.

Here is an Example:

John is a director and shareholder of PlanA Ltd.  He receives an annual salary of £12,000 plus dividends of £80,000 for the last 5 years.

He’s been paying small contributions of £100 per month into his personal pension over that time.

John wants to use his pension fund to purchase a commercial property which means he needs to make a one off contribution of £100,000.

As his salary is too low under the NRE limits for a personal contribution, this is paid by the company and should receive corporation tax relief.

The rules allow him a total contribution of up to £165,200 in the  2016/17 tax year. This is by bringing forward unused allowances of £126,400:

(£50,000 – £1,200 = £48,800) plus (£40,000 – £1,200 = £38,800 x 2) to add to the current year’s unused £38,800.  Well within the £100,000 required.

Further reading: Employer Pension Contributions for a Company Director.

If you would like to talk to us about how this might work for you, call us on 0117 290 0370 (mention this article).

Or you can send us an email: hello@cardens.co.uk

  • Hillary Carden

    Hilary is a force to be reckoned with in the pensions field. She founded Cardens in 1993 and Cardens Pension Trustees Ltd in 1995 and became one of the first women to become a Registered Life Planner® and with 30+ years experience of advising on and managing pension schemes, she really is an expert in retirement and financial planning.

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