Pension and NEST

LynWest

Hi Folks

I have a self employed client who this year formed a company. She takes the minimum wage where she gets to the 0% rate of NI but under the tax threshold. The companies profit is likely to be about £50k after her wage on which she has paid no tax.

When self employed she put money into her personal pension, to get the tax relief. As a director can she now pay into this pension scheme through PAYE and have this deducted from her wage before tax but not before NI, which to me seems the simplest, but my understanding is that she can't because with personal pensions the pension company claims the tax relief from HMRC so if you pay £80, HMRC make it up to the £100.

As an employer would she have to set up a stakeholder pension, and then her contributions out of wage would be paid before tax but not NI? then if the company contributed too i take it these are tax deductable against CT? If so would you advise she contacts an idependent financial advisior or that she signs up to NEST and uses them as they are the providers under the governments new pension regulations that are coming into effect? Any advise is more than welcome, i HATE pensions they are a mine field i try to avoid!!! Thanks

Monsoon

I dislike pensions also.
However, from what I have gleaned, if she actually wants a pension and wants a good return, NEST may not be the best option (it's basically the default for anyone who doesn't really want to do it but needs to do it under the new rules).

She should see a financial advisor who can run her through the options, but she should definitely look into it. If you're not confident advising on the options, then referring her to an IFA is the best thing to do.

Dcollins

I'd refer her to an independent FA, far too much scope for things to go wrong.

Contributions normally allowable, but the 'wholly and exclusively' test applies. Remember to disclose in the accounts.

deanshepherd

LynWest wrote: »

As a director can she now pay into this pension scheme through PAYE and have this deducted from her wage before tax but not before NI, which to me seems the simplest

To me that sounds the most complicated solution.

Either she can carry on making net contributions herself and keep getting tax relief at source or the company can start making gross contributions and get corporation tax relief. I tend to opt for the latter. Forget about NEST and deducting via the payroll.

payrollpro

Lyn,

Under no circumstances can she do this. All forms of personal pension are distinct in that the pension provider is responsible for obtaining the relevant tax relief. Only a fully approved and registered occupational pension scheme can operate by deducting the contributions from gross pay before income tax calculations are made.

The answers are right, she needs to obtain specialist guidance from an IFA who will show her what to do next. Saying that I agree totally with Monsoon and Dean (why would anyone want to disagree with them?) in that NEST is best avoided by a company like this.

The idea of NEST is that small companies can choose this option in the full knowledge that many years into the future their employees will not be able to sue them for alleged lost investment returns. Those companies seeking workplace pension schemes have to obtain several quotes and show they have used due process in choosing a particular provider otherwise their employees will have cause to complain if their final pension is not as expected.

Using NEST protects the employer because choosing them is automatically deemed to be suitable. Our clients need to understand this as we move swiftly towards autoenrolment which will affect our clients over the next few years.

Putting together an invitation to tender and evaluating provider bids takes time and it costs, so going the NEST route in these circumstances makes sense. Doing so for owner managed companies doesn't!

My favoured route is to turn the scheme into an employer funded personal pension scheme. Where the director pays no NI the savings on CT used to be 21% compared to the personal tax relief of 20% but now the small company rate is also 20% it makes little difference. If the director does pay NIC's then making it EFPPS means they take a lower salary and save 25.8% total NIC (salary sacrifice) along with the CT savings. There is no benefit in kind charge on employer pension contributions (yet!) so it can be beneficial.

That's why she needs an IFA to sort it out. Oh, and don't forget, she can get the company to pay for up to £150 in IFA fees for pension advice and there is no BIK there either.

Payrollpro

Monsoon

Thanks PP, a very informative post!

LynWest

Thanks everyone, especially payroll pro, very informative, I feel much better now. Didn't know about the IFA £150 without incurring a BIK either. Many thanks