I am about to start a pension scheme up and would appreciate any help with the following:
I have a small Limited Company and currently have no pension at all.
I want to reduce my CMS payments to reflect the pension payments I will be making which will be approx. 25% of my gross income (I am old enough to justify this income proportion).
My pension advisor recommends paying contributions through the Ltd Company (thus with no tax to pay on them) which will eventually reduce dividend payments to myself and thus my income will drop. The problem with this is that it will take a year or so to show this through my annual accounts and so I will still be paying CMS at the same level as now even though I have a hefty pension to pay as well.
I assume that the CMS will only take notice of a private pension to reduce their payments immediately and not one that is paid through my company?
as you have a limited company, then soon as you start paying into a private pension, you should be able to let CMS know right away. send them the pensions documents as proof. but the way they operate, they will only re-calculate your payments if income drops/increase by 25%. paying 25% of income into a pension is excessive by their standards. so they may accuse you of diverting income. i would avoid that if I were you.
As a Limited company you can already control what you pay yourself, so you can reduce your dividends by that much immediately and then decide your pension contribution at the end of the year.
In my case, Limited company, sole director and pension paid by the Limited company, I do not even need to inform CMS about pension contributions. All they are interested in is my payments to myself, salary plus dividends. I am fully up front with those and that is what I am assessed on, pension is not mentioned because it goes straight from Limited company to pension scheme.
It would only become relevant if you were paid full salary and then you paid your pension from your salary as a private contribution - that then becomes visible as it is on the pay slip.
The posters above me have far more experience than me of this, so definitely go on their advice. The only comment I would make is whether you would gain more in tax benefit than you would lose in additional maintenance you may have to pay - in other words look at the overall picture, not just elements of it.
You do still benefit from a tax perspective when paying in via the Limited company. For pension contributions you do not have to pay corporation tax, so that is a 19% saving. Plus if you pay the equivalent of the pension scheme to yourself in dividends, that would attract minimum 7.5% Div tax, maybe 32.5% if above £37.5K. So essentially saving corp and div tax if paying into pension direct from the company.
HRabbit wrote: Yes, good point. Doesn't stop the value of your pension pot diving during a global pandemic though :-)
This is true, but on the other hand, any investments made by your pension now have a chance of climbing in value quite sharply over the next 5 - 10 years, say, as the pandemic ends and the global economy recovers.