Large Pension Contributions

[minthemouse]

Hi,

I’m currently paying myself 12K Salary, 38K Dividends and my company is currently paying 38K into my pension gross. I want to prepare for retirement by taking out the retained profit that is in my company by making a large pension contributions this Tax year. Carrying forward my pension allowance from three years ago I’ve worked out I can contribute up 88K this tax year . Since I’m making such a large contribution I figured I cannot continue to pay to the pension gross direct from the company as its not going to pass the whole and exclusively test and will ring alarm bells with the HMRC. I was thinking of going completely salary and paying the pension from my personal account. However my accountant is saying that it is more tax efficient to pay pension net of tax direct from my company account into my pension.

I’ve never hear of this before. I’ve only heard of paying gross from the company or net of tax from personnel account. Has anyone else come across this ? If so did they find it was more tax efficient to do this ?

I’ve scanned the net and I only found this that seems that could be explaining it.

Can company pay personal pension contributions? | AccountingWEB
Not sure if you can see the response but it says the following:

“If the company is paying the director's personal pension contribution net of tax relief, you must either charge it to the director's loan account or treat it as a taxable benefit of settling the director's personal debts, which is one of those BIKs that does not go on a P11D, but must be processed through the payroll - in which case the net premiums plus er's NI would be allowable as a business expense of the company and the director would still disclose the net contributions paid on his own SA tax return.”

[Jessica@WhiteFieldTax]

HMRCs guidance on this area is here.

Specific deductions: registered pension schemes: wholly & exclusively: controlling directors & shareholders

I see the comment

"One situation where all or part of a contribution may not have been paid wholly & exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer. In this situation, you should consider whether the amount of the overall remuneration package, not simply the amount of the pension contribution, was paid wholly and exclusively for the purposes of the employer’s trade. "

as being pertinent. For a typical PSC the whole company income is from the efforts of the worker, as a consequence of which, leaving IR35 aside, the split between salary / dividend / pension is at the discretion of the director. That suggests HMRC would struggle to oppose any level of pension contribution so long as it is within the overall headline limits.

I wouldn't then give up straight off on the wholly and exclusively issue. There is nothing to be lost in you or your accountant writing to HMRC for clearance: but do so in plenty of time, they will probably need to be reminded a few times.

P11Ding pension benefits, or payrolling them, is not commonplace.

[northernladuk]

I thought there was a 50k limit a year or summat as well?

[Moscow Mule]

I thought there was a 50k limit a year or summat as well?

Link suggests you can rollover three years limits if required.

Cap on pension contributions, personal or employer | AccountingWEB

[Jessica@WhiteFieldTax]

I thought there was a 50k limit a year or summat as well?

Yes, £50k, with three year carry forward of unused relief, which OP refers to.

[lithium147]

If paying from the company, the pension is an expense for the company.
Could the pension cause the company to make a loss for the year, and thereby receive a CT rebate (from previous years)?

For example, over last 10 years, the company has retained profits of 200K
Then on the 5th april a 50K pension payment is made, and on the 6th april another 50K pension payment
So a total of 100K pension payments for the accounting period.
Lets say the profit (before pension) for the same period was 50K.
So profit after pension is 50K - 100K = -50K
Therefore, CT = - 10K

Is that how it works?

[Jessica@WhiteFieldTax]

If paying from the company, the pension is an expense for the company.
Could the pension cause the company to make a loss for the year, and thereby receive a CT rebate (from previous years)?

For example, over last 10 years, the company has retained profits of 200K
Then on the 5th april a 50K pension payment is made, and on the 6th april another 50K pension payment
So a total of 100K pension payments for the accounting period.
Lets say the profit (before pension) for the same period was 50K.
So profit after pension is 50K - 100K = -50K
Therefore, CT = - 10K

Is that how it works?

In principle, but you can only go back one year. Any loss that cannot be relieved by going back one year has to go forward.

[IR35 Avoider]

I don't believe there is anything wrong with your company paying an 88K contribution.

Based on my past research, I don't think a one-man contractor company paying into the pension of the person who has brought in the money needs to worry about the wholly and exclusively test. I think the only limits you need to be concerned with are pension contribution limits (which you've already considered) and whether you have enough potential profits in the current and previous year to offset the contribution against.

I'm in my third year in a row of paying myself 7K salary and putting almost all the rest rest into pension. Contribution last year was 81K and this year is on target to be similar.

It's not clear why you're not taking the retained profit out as dividends in the years after retiring.

To answer your question, I have heard of a company paying personal contributions directly, however I believe there was no tax advantage, the tax situation was exactly the same as if the company paid salary and the individual made the contribution. It was probably done for administrative convenience as the payment was into a defined-contribution scheme run by the company, and where the company was also making a contribution. (The employee specified what they wanted to contribute and it was shown as a deduction on the payslip.) (The same company no longer does this - these days employee contributions are done be salary sacrifice.)

[Contreras]

HMRCs guidance on this area is here.

Specific deductions: registered pension schemes: wholly & exclusively: controlling directors & shareholders

I see the comment

"One situation where all or part of a contribution may not have been paid wholly & exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer. In this situation, you should consider whether the amount of the overall remuneration package, not simply the amount of the pension contribution, was paid wholly and exclusively for the purposes of the employer’s trade. "

as being pertinent. For a typical PSC the whole company income is from the efforts of the worker, as a consequence of which, leaving IR35 aside, the split between salary / dividend / pension is at the discretion of the director. That suggests HMRC would struggle to oppose any level of pension contribution so long as it is within the overall headline limits.

Not only would HMRC struggle to oppose it, their own guidance effectively says that the default position for one-man-band contractors should be to allow it.

BIM46035 opens with "A pension contribution by an employer to a registered pension scheme in respect of any director or employee will be an allowable expense unless there is a non-trade purpose for the payment." and later says "You should accept that the contributions are paid wholly & exclusively for the purposes of the trade where the remuneration package paid in respect of a director ... "

BIM47105 opens with "That an employee or director is a close relative or friend of the business proprietor or controlling director does not mean that their wages or salary is automatically disallowed for tax." and closes with "If, having established the relevant facts and considered the guidance ... you consider that a pension contribution was not ... for the purposes of their trade, you should first make a report to [the] CAR Pension Scheme Service Technical Team ... before challenging the deduction."

PCG article here: 'Wholly & exclusively' rule is limited - HMRC | PCG

IR35 Avoider makes a valid point about retaining the profit in the company and withdrawing as dividends. But also worth noting that by dumping the sums into a pension also mitigates against HMRC later trying to make an IR35 grab at the monies, if that was ever a concern.