{"id":8344,"date":"2021-10-01T07:19:55","date_gmt":"2021-10-01T07:19:55","guid":{"rendered":"https:\/\/www.foxymonkey.com\/?p=8344"},"modified":"2022-11-23T09:47:32","modified_gmt":"2022-11-23T09:47:32","slug":"pension-isa-comparison-ltd-company","status":"publish","type":"post","link":"https:\/\/www.foxymonkey.com\/pension-isa-comparison-ltd-company\/","title":{"rendered":"Is Pension better than ISA for Limited Company Directors?"},"content":{"rendered":"\n

Is a pension better than an ISA for limited company directors? And if so, by how much?<\/p>\n\n\n\n

Company directors can have their LTD companies pay straight into their pension. This is called an employer contribution<\/strong>. If you are a company owner, this is an amazing tool, because you can pay yourself in a very tax-efficient way.<\/p>\n\n\n\n

Take a low salary tax-free (typically \u00a38-12k per year) and then the rest as dividends taxed at 7.5% up to \u00a350k annual income. Above \u00a350,270, taking more dividends stings you with 32.5% tax, and that’s AFTER having paid a 19% corporation tax on it! Not great.<\/p>\n\n\n\n

That’s why limited companies pay straight into the pension of company directors. This means zero corporation tax<\/strong> on the pension contribution and zero income tax<\/strong> until later in life.<\/p>\n\n\n\n

It’s no surprise that most of the rich company owners I know have already maxed out their pensions.<\/p>\n\n\n\n

Pensions work for 3 main reasons:<\/p>\n\n\n\n

  1. Your future self won’t be earning as much, so will be paying lower taxes<\/li>
  2. Pension money grows tax-free<\/li>
  3. You cannot touch the pot until later in life so you cannot spend it<\/li><\/ol>\n\n\n\n

    The fact you don’t pay inheritance tax on pensions is also an added bonus.<\/p>\n\n\n\n

    But how much should you pay into your pension? Should you pay the maximum into your pension? That’s \u00a340,000 in 2021\/22 tax year, as long as you’ve got the profits!<\/p>\n\n\n\n

    We know that pensions are great tools. But I want to look at the numbers and see how much of a tax benefit the pension actually gives me.<\/p>\n\n\n\n

    Are pensions really worth it if I am locking my savings away for decades?<\/p>\n\n\n\n

    How much am I “losing” if I take an extra income and pay into my ISA instead?<\/p>\n\n\n\n

    I will answer this question for the LTD company director.<\/p>\n\n\n\n

    Note: Full time employees<\/strong> should definitely take the company matching contribution hands down. So if your employer pays 5% if you pay 5% into your pension, then do it. That's 100% return and free money. I'd always take that. Whether you should contribute more is a discussion for another day.<\/pre>\n\n\n\n
    Back to limited company owners.<\/p>\n\n\n\n
    Are pensions worth it for a Limited company director on a \u00a350k income?<\/h2>\n\n\n\n
    I want to find out whether pensions are actually worth considering AFTER having paid ourselves a \u00a350k income.<\/p>\n\n\n\n
    Taking a \u00a350k income from the business is a very common scenario.  That’s what most company owners do because staying within the basic rate tax threshold is very tax-efficient.<\/p>\n\n\n\n
    Typically the director gets paid a small salary, \u00a38,840, and takes the rest  \u00a341,430 as dividends. Total \u00a350,270 costs only \u00a32,677 in income tax. That’s a 5.3% effective tax!<\/p>\n\n\n\n
    Of course, the company pays corporation tax (\u00a37,871 to be exact). But overall, it’s a tax-efficient strategy for a director who wants an income from their business.<\/p>\n\n\n\n
    Now let’s assume the limited company makes more than \u00a350k a year. If you or your business don’t really need the extra money, there are 3 options:<\/p>\n\n\n\n
    1. Invest through your LTD Company<\/a><\/li>
    2. Contribute to your pension<\/li>
    3. Take extra income and invest in an ISA (or buy-to-let or any other personal investing).<\/li><\/ol>\n\n\n\n
      You know I have a soft spot for LTD company investing because it strikes a nice balance between having access to your money and tax efficiency. I even created an entire course<\/em><\/a> about it \ud83d\ude09<\/p>\n\n\n\n
      But I want to focus on the other 2 options. Should you take an extra income and an extra tax hit to invest through an ISA or put this money in your pension instead?<\/p>\n\n\n\n
      Pension vs ISA Example<\/h2>\n\n\n\n
      There are 2 friends, David and John. They both take the same income from their LTD companies, \u00a350,270. A small salary and dividends.<\/p>\n\n\n\n
      They both have a \u00a320,000 surplus in their LTD companies. David decides to contribute the amount to his pension. John doesn’t like pensions and prefers to take the 20k in dividends and invest through an ISA.<\/p>\n\n\n\n
      Every year:<\/strong><\/p>\n\n\n\n
      <\/td>Income<\/td>Pension<\/td><\/tr>
      David<\/td>\u00a350,270<\/td>\u00a320,000<\/td><\/tr>
      John<\/td>\u00a370,270<\/td>0<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
      How much money does John “sacrifice” to keep it accessible?<\/p>\n\n\n\n
      Assuming a modest 5% annual return for both:<\/p>\n\n\n\n
      \"Pension