Author: Amit Roy

Pension contributions savings

A. Pension contributions for individual earning between 50k and 60k and paying high income benefit charge

We wish to demonstrate the savings by an example below. Say, Jack earns 55k a year and pays high income benefit charge.  We have prepared his tax calculation showing two scenarios one without and one with pension contributions.

 Tax without PensionTax with Pension
Income55,00055,000
Less: Personal Allowance12,57012,570
Taxable Income42,43042,430
 RateBandAmountRateBandAmount
Tax Payable20%37,7007,54020%40,20018,040
 40%4,7301,89240%2,230892
 Total42,4309,432 42,4308,932
High income child benefit56652835
Tax due9,9989,215
Tax savings7832
Pension top up5003
Total savings1,283

Notes:

  1. Say, Jack makes a pension contribution of 2,000 with HMRC top up of 20% it is grossed up to 2,500 (2000 divided by 0.80). His basic rate band increases from 37,700 to 40,200 (37,700 + 2,500)
  2. Difference between 9,998 and 9,215.
  3. 20% pension top-up claimed by the Pension company on tax payer’s behalf.
  4. Thus, on a pension contribution of 2,000; Jack saves 1,283 that is c64%
  5. High Income child benefit computation
Gross Income55,00055,000
Less: Gift Aid00
Less: Pension contribution02,500
Adjusted net income55,00052,500
Less: Threshold50,00050,000
Net5,0002,500
Dividend by 10050%25%
Child benefit received1,1331,133
High income child benefit566(50% of 1,133)283(25% of 1,133)

B. Pension contributions for individual earning between 100k and 125k

 Tax without PensionTax with Pension
Income105,000105,000
Less: Personal Allowance10,070112,570
Taxable Income94,93092,430
 RateBandAmountRateBandAmount
Tax Payable20%37,7007,54020%40,20028,040
 40%52,23022,89240%53,48021,892
 Total94,93030,432 42,43029,432
Tax savings10003
Pension top up5002
Total savings1,500

Notes:

  1. Reduced Personal allowance computation
Gross Income105,000105,000
Less: Pension contribution02,500
Adjusted net income105,000102,500
Less: Threshold100,000100,000
Net5,0002,5002
Divided by 22,5001,250
Standard Personal allowance12,57012,570
Reduced Personal allowance10,07011,320
  • Say, Jack makes a pension contribution of 2,000 with HMRC top up of 20% it is grossed up to 2,500 (2000 divided by 0.80). His basic rate band increases from 37,700 to 40,200 (37,700 + 2,500)
  • Thus, on a pension contribution of 2,000; Jack saves 1,500 that is c75%

    C. Pension contributions for individual earning over c125k
 Tax without PensionTax with Pension
Income130,000130,000
Less: Personal Allowance00
Taxable Income130,000130,000
 RateBandAmountRateBandAmount
Tax Payable20%37,7007,54020%40,20028,040
 40%92,30036,92040%89,80035,920
 Total130,00044,460 42,43043,960
Tax savings5003
Pension top up5002
Total savings1,000

Notes:

  1. Say, Jack makes a pension contribution of 2,000 with HMRC top up of 20% it is grossed up to 2,500 (2000 divided by 0.80). His basic rate band increases from 37,700 to 40,200 (37,700 + 2,500)
  2. Thus, on a pension contribution of 2,000; Jack saves 1,000 that is c50%

Point to note:

  1. Pension contribution needs to be made in the tax year i.e. before 5th April 2023 to take benefit of these savings for the tax year ended 5th April 2023. This means tax relief can be claimed for a contribution only in the tax year in which payment is made. FA 2004 Sec 188 (1)
  • Salary sacrifice pension contributions are even more beneficial as tax payer saves both tax and National insurance.

Basic details to remember while drafting a board resolution:

Essential points to remember while drafting any resolution

1) Name of the company

2) Date of the board meeting

3) Place of meeting (avoid holding a meeting in UK for any non-UK entity), as this will make the entity tax resident in the UK.

4) Attendees- directors and non-directors (mention if personally present or over the phone)

5) Confirmation that the quorum is present

6) Appoint a chairperson

7) Directors interest to be expressed either in the beginning or as part of the resolution

8) Give a brief rational for passing a board resolution(s) for each subject. Ensure to attach any referred key documents to the resolution.

9) Give details of the resolution(s) passed.

10) Conclude by saying thanks to Chair

11) It is enough that the chairperson sign the minutes, however all present could also sign.

This blog was guest written by my friend and colleague Mr. Girish Agarwal. He is a fellow Chartered Accountant specialising in offshore matters.

Foreign gains via non-resident company

Foreign Gains accruing to non-resident companies whose shares are owned by UK tax residents may be taxable in the UK.

Background

Usually, a company not resident in the UK is not normally liable to UK tax nor its shareholders.

Thus, UK residents could avoid tax by holding assets overseas via a foreign company.

Rule

Since 27 November 1995, foreign gains accruing to non-resident companies whose shares are owned by UK tax residents are attributed to the UK tax resident and taxable in the percentage of shares held by them in that foreign company.

Note, NO gain is taxed in case percentage of shares held is less than 25% on and after 06/04/2012.

Example

Mr A opens a company in India and buys a house. After few years company sells the house. Indian company will pay taxes on the gain in India and Mr A will also be liable to pay taxes on the gain in UK.

Foreign tax relief is available. DTAA may also be applicable.

Losses

Foreign losses accruing to non-resident companies are NOT attributable to UK tax resident. However, current year losses are allowable to get a net gain figure.

Reliefs

Two main reliefs:

  • Assets used for a trade; or
  • Where tax avoidance was not the main purpose

Source:

HMRC CGT Manual CGT57200P onwards

TCGA Section 3 onwards

Acknowledgement:

  1. Para 49.7 in Tolley’s Capital Gains Tax Main Annual
  2. Bloomsbury Capital Gains Tax
  3. For further reading, visit our Worldwide Disclosure blog.

Profit extraction via Pension in owner managed businesses

A similar option to savings via pension is savings via ISA after profit extraction through dividends.

Main advantage of pension option:

  1. Pension withdrawals can be timed.
  2. Pension investment growth is gross which is c30% higher than in ISA option.
  3. First 25% of pension pot can be withdrawn tax-free.

How does this work in practice?

An individual can be a member of as many pension schemes as he/she likes. Thus, a director should continue making contributions in the auto enrolment pension of the company either via relief at source or net pay arrangement.

Besides the above, director can open a low-cost Self invested Pension Plan (SIPP) via pension providers like AJ Bell or Vanguard etc. Where employer company can directly make payments to the pension provider. Ensure payment are directly made from the employer company to the Pension provider and not via the employee.

Hiring an advisor – In case you are lucky enough to have built up substantial funds in your pension pot, you may think about hiring an Independent Financial advisor, main points to remember are:

  1. Be clear about their charges
  2. Agree an investment performance criteria; and
  3. Lastly, monitor the above two points regularly like annually.


Bonus material

One risk with pensions is financial irregularity in the pension company.

Annuity payments are made till purchaser is alive.

SIPP belongs to the employee. He can take it with him when he leaves the employment, or the company closes down.

Pension age since April 2015 is 55 years increasing to 57 years from 2028 then will increase in line with state pension age.

Withdrawals – after reaching pension age, whole 100% of pension fund can be withdraw. But first 25% is tax free balance is taxable.

Acknowledgement: Rayney’s Tax Planning for Family and Owner-Managed Companies

Directors and PAYE

1.0 Basics

• Directors are employees.

• It is not necessary for Directors to be paid National living/minimum wage.
see HMRC Tax Bulletin 50 with examples and ICAEW Tax guide 07/00.

• Directors usually register for Self-assessment (SA). They will need to complete employment pages of the return.

• Two methods for computing National Insurance Contributions (NICs) for directors:

a) Cumulative ; or

b) Regular employee method

Please note both method give similar results at the end of the tax year.

1.1 Bonus facts

• Directors can register for `Annual Scheme` who are paid on an annual basis to avoid sending (Employee Payment Summary) EPSs every month.

• Dividends can only be paid when there are sufficient profits made in the business this could be current year profits or brought forward reserves.

• NIC is not due on Dividends.

• Record keeping: PAYE records needs to be kept for 3 years.

• Its advisable to keep records for 7 years.

2.0 Paying directors without running payroll
We can put up till £123 (LEL : tax year 24-25) x 52 = £6,396 as director’s wages.

For tax year 2025-26 ; as ST is lower than LEL we can only put £96 x 52 = £4,992 as director’s wages without running a payroll.

See link below:
https://www.gov.uk/paye-for-employers

3.0 Optimum salary for directors
For tax year 2026-27 salaries till personal allowance are still the optimum level with or without avaliability of employment allowance.

4.0 Minimum Salary for State Pension
Any individual (including a director) earning between LEL and PT a week, is treated as having been paid the contributions to protect your National Insurance record.

  • Employee starts paying NIC on salaries over PT and
  • Employer starts paying NIC on salaries over ST

See link below:
https://www.gov.uk/national-insurance

4.1 Directors staring during the year

Paying a salary at a rate at least equal to the LEL (£6,500 per year for tax year 2025-26 ) allows the individual to receive a National Insurance (NI) credit for the year, making the year a qualifying year for state pension purposes. Example an individual starting in December, paid monthly, needs to be paid £6,500 /4 = £1,625 per month. It is important to note that although definition of qualifying year refers to weekly amount, earnings are looked from annual perspective. Also note, pay in each pay period should be over the LEL otherwise that pay period is treated as `zero`.
Source: ICAEW guidance and 14.2 National Insurance Contributions by Karen Speight

5.0 Method of payment of directors salaries
Usually Director’s salary is credited in their account via a Journal entry. This is alright when Director Loan Account is in Credit. In case Director Loan Account is in debit i.e. monies have already been withdrawn, it would be necessary to actually pay the salary, which director could transfer back to the company.

6.0 Interest on directors loans
If a director has given loan to his company and charges interest on it, this interest income will be covered by Personal savings allowance.

7.0 Auto enrollment
a) As per Pension regulator “organisation with one or more directors who do not have contracts of employment is not an employer if it does not have any staff other than the director(s).

The company will have no automatic enrolment duties and does not need to complete a declaration of compliance. In this case they should let pension regulator know that they’re not an employer.”

b) Employer can pay full 8% contribution; as per gov.uk .

See link below:
Pension Regulator website

8.0 Starting PAYE during the tax year 

Please see our note on related blog.