Hello,
I wonder if anyone can help. I am trying to calculate whether it is more efficient for a husband & Wife company to pay into a pension scheme from individual taxed income, or whether its better for the company to contribute.
The company should make profits around the £25-£30K mark, and both husband and wife are lower rate tax payers.
Re my calculations I have assumed a profit of £25K, and estimated the pension contribution at £1K.
So if company pays £1000, then profits are reduced to £24K and we get a CT bill of £3325, leaving reserves in the company for the year of £20675.
If the husband and wife pay then the company pays a divi of £780 to the directors and the directors pay £780 to the pension fund grossed up to £1000.
However CT on £780 @19% = £176
Plus CT at Marginal Rate = £3451.35.
So net funds in the company are now:
£25K -£176-3451.35-780 = £20592.65
ie £82.35 worse off if its is paid individually by the directors.
Hopefully my figures are correct. I have done the same calculation for the company profits at £10K and also £50K, and I find that at £10K the dividend option is better by £44, at £25K it is worse by £82, and at £50K it is worse by £45.
So assuming my calculations are correct does anybody know a rule of thumb/formula to save my poor brain?
Thanks in advance
Lee
Lee
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Replies (4)
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Thanks Kevin
Yes thanks, although with the correct 19% (no idea where I got that figure from), I think I still get at £0 company profits the divi and individual option is better by about £71, at £25K company profit it is £55 better off, if the company pays and at £50K company profits it is £17 better of if the company pays.
So do you agree that it is looking a slightly better if the company pays rather the the individual at profits over £25K, does anyone know at what point between £0 and £25K profit where it becomes more advantageous for the company to pay into the scheme.
Thanks
Lee
Rule of thumb
I thought the rule of thumb was whether the marginal CT rate on the profit was higher or lower than 22%. If it is lower you pay a dividend, and if it is higher you make an employer contribution.
For example to get £1000 in a pension scheme requires £1000 of profit if you have an employer contribution and £963 of profit via a £780 dividend and a personal contribution (assuming there are net relevant earnings elsewhere to set against). £963 is £780 grossed up at 19%. So at or above £50K profit divis are usually the way to go.
Since the marginal rate is 23.75% between £10K and £50K and the NCD rate only makes that worse, then it is generally better to make an employer contribution below £50K.
NeilW
Thanks Neil - Although
Thanks Neil,
Um. my calculations must be a bit iffy, coz at £25K profits I calculate its better for the company to pay. I think that may be due to the 19% on the dvidend which comes into play, or perhaps my arithmetic has gone a bit out of sync!
I'll sharpen my pencil and have another go, must try harder!
Lee