Another Backdating Company Question.

[iguy2008]

Hi

I’m hoping someone can help. My wife and I are both directors of a limited company and we both contract (albeit that my wife’s billing rate is much lower than mine). I was not in a contract for most of the calender year 2018 but have being working since last November 2018.
I’m now looking to backdate company pensions for both myself and my wife and the notional figure we can back date is £110K each based on the years/figures below (see fig a)

The company has sufficient retained funds to afford such an investment but my accountant is advising me against putting 220K into the pension on the basis that since that amount is higher than my turnover for the current company year, it would trigger a loss that could lead to a HRMC enquiry.

On that basis, he has recommended only putting in 110K between the 2 of us rather than 110K each.

I thought it was possible to make the payment from retained funds rather than just current profits.

I was planning to close the company by the end of this year anyway due to IR35 and wanted to push as much into our pensions as possible prior to this.

I have seen other posts where this seems to have been done so I’m not sure if my accountant is being unduly cautious.
Any guidance would be appreciated.

Thanks.

(fig a)
Tax Year Pension Amount Paid Additional Amount Contribute Husband Additional Amount Contribute Wife
2019-2020 0 40000 40000
2018-2019 10000 30000 30000
2017-2018 0 40000 40000

[northernladuk]

Another thread on exactly this here.

https://www.contractoruk.com/forums/...s-profits.html

Very confusing as the OP in that thread said both IPSE and his accountant said no to creating a loss but others actually did it and got their CT refund back. Not sure if the size of your situation brings any additional risk to bear.

So appears, against most professional advice it is possible.

Couldn't you roll the company in to next year even though it's not trading which gets you an extra years contributions either on top of the 110k each or to add to the 110k between you to make it sting less?

[Maslins]

If you've got a big cash pot in your company and want to close, have you considered an MVL? (yes, some may say I'm biased) Can potentially get all your cash out, likely suffering a little under 10% personal tax after ER and annual exemption factored in. The money is then post tax personal funds, which you can invest as you see fit.

Alternatively yes you can do a big pension contribution, which will both suffer no personal tax at all now, and also likely get some CT savings/rebate too. Pension will likely be taxed when you come to withdraw it though.

Re the scale of it, it would make me a bit nervous, mainly just to consider all the possible knock on impacts (some obvious, some less obvious). I think stuff like this is really more Independent Financial Advisor territory than accountant, so if you did want to proceed with the huge pension, worth running by an IFA.

[iguy2008]

If you've got a big cash pot in your company and want to close, have you considered an MVL? (yes, some may say I'm biased) Can potentially get all your cash out, likely suffering a little under 10% personal tax after ER and annual exemption factored in. The money is then post tax personal funds, which you can invest as you see fit.

Alternatively yes you can do a big pension contribution, which will both suffer no personal tax at all now, and also likely get some CT savings/rebate too. Pension will likely be taxed when you come to withdraw it though.

Re the scale of it, it would make me a bit nervous, mainly just to consider all the possible knock on impacts (some obvious, some less obvious). I think stuff like this is really more Independent Financial Advisor territory than accountant, so if you did want to proceed with the huge pension, worth running by an IFA.

Hi Thank you to both posters. Yes I am planning to do an MVL with the remaining company funds. However, my thinking was to first maximise the pension and then do the MVL on the basis that this reduces CT and 10% tax only on the remainder amount within the MVL.

To the other poster, yes I could keep the company going for another year but I'm afraid that ER may be pulled in the meantime. Im not that interested on carrying forward any loss to claim against future CT (I dont quite understand how there is a loss when most of the backdating amount is being paid out of retained funds that have already had CT applied).

Im in mid 50's so see this as a way to wind down my company and release my warchest in a tax efficient manner.

I will also have a chat with IPSE and my IFA but any other views are welcome.

Many Thanks

[WordIsBond]

If your goal is tax efficiency I think you'd be making a mistake, in the long term. Those pension funds, when withdrawn from the pension, are going to incur tax, 25% tax free but the rest at 20% as things stand now, perhaps even more later. And in the eternal quest for more revenue for HMG, who knows how much worse those provisions are going to be?

But let's just say none of it changes. You presumably will have enough income already to take up your personal allowance, so anything extra you put into the pension is going to be taxed effectively at 15% -- 1/4 tax free, the rest at 20%. So to get funds out of your pension, you'll pay 15%, to get funds out of your company (under ER) you'd pay 10%. And, going the latter route, you avoid the risk of tax becoming significant worse.

You do have the benefit with the pension of tax-deferred compounding of your investments. That offsets the other approach somewhat, although you can use your full ISA allowance to get the same on a lot of it.

Obviously, pension contributions to a level sufficient to wipe out your profit makes a lot of sense, because you are saving not just the ER but also the corporation tax. But if I were in your position I wouldn't go any further than that. Pensions to wipe out profit, the rest stays in ER, pay the 10%, and have the money be free of future tax liability.