Originally posted by WordIsBond
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You will want to check this with your accountant, and it may depend on your tax year. But I think if you
A. Have a lot of retained funds
B. Want to make large contributions
C. Act quickly
then it may be to your benefit.
Reasons:
1. It is definitely possible to carry over an allowance from the three previous years, if you had a personal pension account opened during those years.
2. You can contribute up to £40K / year.
3. That means if you have the funds available and made no contributions, and you act now, you can contribute £40K for 2017-2018 and £40K for each of the three preceding years (2014-2015, 2015-2016, 2016-2017). If you made contributions in any of those years, that reduces the amount you could contribute now on a pound for pound basis.
4. If you wait until after 6 April, you lose the allowance for 2014-2015.
5. You have to use the current year before you can use prior years. So to use the 2014-2015 allowance, you have to contribute this year's full allowance plus the 2014-2015 allowance before 6 April.
6. Any contributions reduce your company's taxable profit and thus save 19% corporation tax.
7. If you make multiple contributions for multiple years, it could put you in a loss position for the year.
8. If you have a loss position for the year, you can carry back the loss to the previous year and reclaim Corporation Tax paid in the previous year. Depending on your tax year, that might result in 20% savings rather than 19% savings, because of the change in CT rate.
9. If your loss exceeds your profit from the prior year, the remaining loss would be carried forward to next year.
If you want to use the 2014-2015 allowance, you need to act quickly. Forget the financial adviser, get the money pumped into the pension fund before the end of this tax year. Then, if you need financial advice as to where to invest it, get it, but the main thing is to get the funds into the pension pot before 6 April. You can transfer your pension somewhere else in May or June if you want to. You can't make 2014-2015 contributions then, it will be too late.
If you are going to create a loss for your current tax year, and are able to grab that 20% savings, again, depending on your tax year, this may require acting pretty quickly. If YourCo's tax year runs April-March, this would definitely be the case, you have to act now. 1% isn't a huge difference, but if you make £80K a year profit and you can wipe out last year's profit by carrying back a loss due to your pension contributions, that tax savings is £800. You could enjoy a nice weekend in Paris with your other half for that.
As to the philosophical questions:
1. I suspect HMG will place further restrictions on the tax benefit of making large pension contributions. I expect the annual limit to be reduced to £20K or even £10K in the future. I also expect the tax relief for higher rate taxpayers to eventually be hit, and with it, the tax relief on company pension contributions will be restricted as well.
2. I do not expect them to have the nerve to change the taxation of pension benefits. The tax free lump sum is unlikely to be touched. They've been pushing and pushing people to increase pension contributions. Auto-enrolment means that almost everyone is going to have a tax-free lump sum in their future. I don't think they dare touch that.
3. If I took the money that is going into pensions as a dividend, I'd be paying 19% corporation tax on it first and then 32.5% dividend tax on the remaining 81%. That's a net 45% or so tax. Even if there were no tax free lump sum, I do not expect to be paying 45% tax on those funds when I draw on the pension in retirement. So deferring the income until retirement is highly tax efficient, even if tax rates get somewhat worse.
Given all that, I've continued to top up my pension, even though I have a very large pension from permie days. I'll need to stop soon because of the lifetime limit. And we are making company contributions to my wife's pension every year (she's a director). We only do £6K a year for her because she is not a fee earner for the company and the amount needs to be somewhat justifiable. The rest, we do out of personal contributions even though that isn't quite as tax efficient.
I also make 5% company contributions for my employees, and encourage them to salary sacrifice at least 10%.
In short, I for one am a big believer in company pension contributions.
A. Have a lot of retained funds
B. Want to make large contributions
C. Act quickly
then it may be to your benefit.
Reasons:
1. It is definitely possible to carry over an allowance from the three previous years, if you had a personal pension account opened during those years.
2. You can contribute up to £40K / year.
3. That means if you have the funds available and made no contributions, and you act now, you can contribute £40K for 2017-2018 and £40K for each of the three preceding years (2014-2015, 2015-2016, 2016-2017). If you made contributions in any of those years, that reduces the amount you could contribute now on a pound for pound basis.
4. If you wait until after 6 April, you lose the allowance for 2014-2015.
5. You have to use the current year before you can use prior years. So to use the 2014-2015 allowance, you have to contribute this year's full allowance plus the 2014-2015 allowance before 6 April.
6. Any contributions reduce your company's taxable profit and thus save 19% corporation tax.
7. If you make multiple contributions for multiple years, it could put you in a loss position for the year.
8. If you have a loss position for the year, you can carry back the loss to the previous year and reclaim Corporation Tax paid in the previous year. Depending on your tax year, that might result in 20% savings rather than 19% savings, because of the change in CT rate.
9. If your loss exceeds your profit from the prior year, the remaining loss would be carried forward to next year.
If you want to use the 2014-2015 allowance, you need to act quickly. Forget the financial adviser, get the money pumped into the pension fund before the end of this tax year. Then, if you need financial advice as to where to invest it, get it, but the main thing is to get the funds into the pension pot before 6 April. You can transfer your pension somewhere else in May or June if you want to. You can't make 2014-2015 contributions then, it will be too late.
If you are going to create a loss for your current tax year, and are able to grab that 20% savings, again, depending on your tax year, this may require acting pretty quickly. If YourCo's tax year runs April-March, this would definitely be the case, you have to act now. 1% isn't a huge difference, but if you make £80K a year profit and you can wipe out last year's profit by carrying back a loss due to your pension contributions, that tax savings is £800. You could enjoy a nice weekend in Paris with your other half for that.
As to the philosophical questions:
1. I suspect HMG will place further restrictions on the tax benefit of making large pension contributions. I expect the annual limit to be reduced to £20K or even £10K in the future. I also expect the tax relief for higher rate taxpayers to eventually be hit, and with it, the tax relief on company pension contributions will be restricted as well.
2. I do not expect them to have the nerve to change the taxation of pension benefits. The tax free lump sum is unlikely to be touched. They've been pushing and pushing people to increase pension contributions. Auto-enrolment means that almost everyone is going to have a tax-free lump sum in their future. I don't think they dare touch that.
3. If I took the money that is going into pensions as a dividend, I'd be paying 19% corporation tax on it first and then 32.5% dividend tax on the remaining 81%. That's a net 45% or so tax. Even if there were no tax free lump sum, I do not expect to be paying 45% tax on those funds when I draw on the pension in retirement. So deferring the income until retirement is highly tax efficient, even if tax rates get somewhat worse.
Given all that, I've continued to top up my pension, even though I have a very large pension from permie days. I'll need to stop soon because of the lifetime limit. And we are making company contributions to my wife's pension every year (she's a director). We only do £6K a year for her because she is not a fee earner for the company and the amount needs to be somewhat justifiable. The rest, we do out of personal contributions even though that isn't quite as tax efficient.
I also make 5% company contributions for my employees, and encourage them to salary sacrifice at least 10%.
In short, I for one am a big believer in company pension contributions.
This is an excellent post. Thank you very much.
What process is involved, in addition to running the payroll by an accountant? Are there any additional filings required?
Really appreciate a response.
thank you very much.
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