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Perhaps someone can advise. I have a private pension scheme. I also receive income from dividends. I do self-assessment tax returns.
At the point I receive a dividend no income tax has been paid. If I then pay that money into my pension, it goes in in full I think (i.e. the pension provider would not claim tax back). Because I have paid it all in to a pension, no income tax would be due on this amount I believe?
i.e. receive a dividend £100, pay £100 into pension, declare both and tax due £0.
Is this correct? I tried searching to find the answer here for example http://www.hmrc.gov.uk/incometax/relief-pension.htm but couldn't see anything similar. It is all pension from salaries where income tax has already been paid.
Not trying to do anything dodgy, just seems a better place to put cash rather than lose a load of it in tax.
why would tax be due?
If you've received it as a dividend, then there is no more tax due, as the dividend is from post (corporation) tax funds.
Dave
Tax is due on dividends:
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnSavingsAndInvestments/DG_4016453
To be clear, I have a job so pay tax on dividends at 32.5%
If you are a basic rate tax payer no extra tax will be due as the tax credit from the corporation tax will cover it. If you are a higher rate tax payer then a top up personal tax payment will required.
Not sure about the pension thing !!!
sorry, forgot there was a difference depending on whether you were basic or higher rate tax payer.
basic rate tax payer pays the same tax on dividends as they receive in dividend tax credit - so net 0%.
I'll shutup now, as I can't help you with your original question 🙂
Dave
No I appreciate your help anyway, it's all a bit confusing. I think I'm right in saying instead of paying 32.5% income tax if I put it in pension no income tax is due.
No further tax is due on dividends for basic rate tax payers. If you pay 32.5% then you are a higher rate tax payer but not top rate.
It is explained in your link.
I think I'm right in saying instead of paying 32.5% income tax if I put it in pension no income tax is due.
Not sure, is it the same as for 'normal income' where you pay the tax and then when you pay into your pension, the tax you paid is refunded into your pension pot?
so... instead of not paying the tax, you pay it, then your pension gets it back.
May well be wrong - I need to speak to my accountant 🙂
Dave
My understanding is that you pay money into a personal pension, the personal pension provider reclaims basic tax then it is up to you to claim any higher rate tax relief in your tax return. There is no concept of you paying your dividend to the personal pension, you simply pay a contribution which is given tax relief.
You only get income tax relief on pension contributions up to £50,000 or 100% of income if lower. Dividends do not form part of "pensionable earnings" so you can't get tax relief based on contributions from dividend income.
I.e...£20,000 salary £30,000 dividends = £16,000 can go into pension on top of which you'll get income tax relief. If you make further contributions you'll not get further relief - you'd be better making the contribution direct from the company, or increasing salary.
Or, if you have been a member of a pension scheme for the last three years and did not make pension contributions upto 100% of your income then you can pay more this year to top up those years;
2009/10 £20,000 salary £5,000 pension contribution
2010/11 £20,000 salary £8,000 pension contribution
2011/12 £20,000 salary £6,000 pension contribution
£60,000 could have been paid into your pension, but only £19,000 was, so you could pay a further £41,000 if you wanted....
This is probably all a bit too indepth and may not be communicated that well, but hopefully it goes some way to helping...drop me a line if you want more info.