Can you help on a pension with a regular index fund?

09 August 2022

Question by Nicoletta

Can you help on a pension with a regular index fund (one that allows employer contributions through a ltd company)?


Answered by Boring Money

Hello Nicoletta,

Yes no problem, here is a bit of information about me and a link to book a free initial appointment.

Mary Green - Rosewood Financial Planning (rosewoodfp.co.uk)
https://calendly.com/maryrosewoodfinancialplanning

Pensions are a complex area and a financial planner will be able to talk you through it, set up a pension if required and arrange for the relevant contributions to be made. If you prefer to do it yourself here is some information about the benefits of contributing to a pension and a bit about index funds. Do bear in mind that index funds have varying levels of risk and that the underlying investments can go down as well as up. Index investing is a simple yet powerful approach to consistent investment portfolio growth. Index funds are investment product designed to track a particular index in the stock market. There are many indexes, broad and narrow, for different asset types. Be wary of narrowly-focused index funds with inherently less diversification, more risk, and higher fees. Typically, as the fund narrows in scope, risk and fees increase.

If you are a director of a limited company, you can contribute pre-taxed company income to your pension pot. As an employer contribution this is an both an allowable business expense and also can be offset against your company's corporation tax. Unlike personal contributions, there’s no limit on what the company is allowed to pay into your pension and
obtain tax relief, providing it meets HMRC’s ‘wholly and exclusively’ test. Employer contributions are also not limited to your relevant UK earnings, but do count towards your annual allowance, which is currently £40,000.

If you have a large amount you'd like to contribute, you may be able to benefit from the 'carry forward' rule. This lets you make use of annual allowances that haven't been used over the previous three years, as long as you've been a part of a registered pension scheme during this time. Also bear in mind your lifetime allowance, which is the maximum amount you can draw from pensions (workplace or personal) in your lifetime without paying extra tax. This figure is currently £1,073,100.

How much tax could I save by contributing to my pension via my limited company?
A company director can personally contribute £40,000 or 100% of PAYE income and still get tax relief. Depending on your earnings, you'll receive tax relief at your highest marginal rate, either 20%, 40% or 45%.

For the 2021/22 tax year, the corporation tax rate is 19%. If you're a basic rate taxpayer, contributing £100 will only cost you £80 because the government will add £20.

As a higher rate taxpayer, a £100 contribution will only cost £60 because the government will add £40, made up of £20 added immediately and £20 you'll have to reclaim later via your tax return.

Another benefit is that employers don't have to pay National Insurance on pension contributions. The current National Insurance rate for 2021/22 is 13.8%, so by contributing directly into your pension rather than paying it as salary, you save up to 13.8%.

In total, this means that your company could save up to 38.8% by paying money directly into your pension rather than paying it in the form of a salary. This may be more tax-efficient than personally making pension contributions, especially if you're limited by how much you can pay into a company director pension personally because of the 100% of PAYE earnings rule.

I hope this helps,

Mary

Answered by

Boring Money