Employer Pension Contribution

[lawfra]

Hi,

I have retired but kept my company going due to the large amount of retained profits. Company has not been trading for almost 2 years now and is not registered as dormant. I am not drawing a salary but taking dividends up to the 20% tax limit. I estimate that it would take me around 10 years to reduce the retained profits down to a reasonable level for winding up without going for MVL. I was told that going the MVL route does not guarantee that HMRC will apply the 10% Entrepreneur's Relief.

I would like to know if it is possible to pay an employer pension contribution up to the £40k limit to my SIPP account using the retained profits and how is this treated by HMRC? Has anyone successfully contributed to their personal pension/SIPP using the retained profits?

Any contribution to this thread is appreciated and thanking you in advance.

[RonBW]

If you have retired then there is no logical way that anyone could claim that you are continuing in the same trade thereby preventing a claim for ER.

[Maslins]

I don't think there would be any issue with you putting money into a pension scheme...whether you get corporation tax relief for that is another matter. Given there's no ongoing trade, presumably it would lead to a £40k loss. You can only carry back losses 1 year under normal circumstances, so if there was no taxable profit last year, there'd be no profits you could offset the loss against. Doesn't stop you putting it into a pension though.

Re MVL and entrepreneurs relief, might be worth checking with a tax guru, but I think you could potentially be ok if you did it soonish. See here, specifically fairly near the bottom "If the company stops being a trading company, you can still qualify for relief if you sell your shares within 3 years". Yes you're not selling the shares as such, but liquidating is similar, in that you pay a capital gain based on the distribution amounts less the initial share capital cost.

[aoxomoxoa]

As I understand it, if you've already started drawing down a personal pension the maximum employer's contribution is £10k (this tax year), reducing to £4k from April.

[lawfra]

Hi Guys,
Thanks for your response, I haven't started drawing down my SIPP pension yet. So, as I understand it I can make a contribution of £40k max from the Company's retained profit account. Has anyone contributed before using retained profits?

[TheCyclingProgrammer]

As Maslin says, you may still qualify for ER so I would explore that option.

Also, if the total capital gain plus any other income you receive does not exceed the higher rate tax threshold then the basic rate of CGT is 10% anyway even without applying for ER.

[IR35 Avoider]

I think you've missed the fact (that Maslins already mentioned) that you probably won't get tax relief on the pension contributions.

Assuming it costs you 1K a year to run the company, it'll cost you 10K to withdraw 10x40K = 400K as dividends, over ten years.

If you put 40K a year into a pension and withdraw 40K a year then that halves the time to 5 years, so 5K cost. But you will also pay 20% * 75% * 200K = 30K tax on the money in the pension when you take it out. So total cost 35K.

[lawfra]

Hi All,
I am not looking for tax relief on the contribution to my SIPP. My intent is to reduce the amount in the Retained Profit account so that I can write off my Company earlier. I will certainly look again into MVL and ER but I been told previously that because I have around £250k in the account the ER may not apply. I am only taking around £20k dividend per year as I have other income from investment. If I can get ER it will be the best route as Maslins suggested. Failing that I would think that putting £40k into my SIPP would save me the 7.5% extra tax on dividend, reducing the time to write off and also save on Accountant's fee.

[Lance]

Hi All,
I am not looking for tax relief on the contribution to my SIPP. My intent is to reduce the amount in the Retained Profit account so that I can write off my Company earlier. I will certainly look again into MVL and ER but I been told previously that because I have around £250k in the account the ER may not apply. I am only taking around £20k dividend per year as I have other income from investment. If I can get ER it will be the best route as Maslins suggested. Failing that I would think that putting £40k into my SIPP would save me the 7.5% extra tax on dividend, reducing the time to write off and also save on Accountant's fee.

Don't forget that you'll have to pay tax to get the money back from your pension.
Why not use the dividend draw down from the company as part of your pension?

[56samba]

I thought the 40k limit does not apply to employer contribs, only employee post tax contribs.

The upper band divi tax is 32.5% so not all at just 7.5%

Dormant company accounts shouldn't cost you £1000 pa.

Tax on the pension would be on three quarters of the sum, after drawing the 25% tax free, and subject to the usual tax free allowances, if youre not earning any other income.

Lets say you leave some in yourco for divi distribution @5k per year, and draw the remaining 75% sum as a pension, from age 55, on a beach somewhere...
5k divi @ 0% tax
11k tax free
plus whatever part of the 25% tax free lump sum you draw.