Backdating Company Pension - Separating Fact From Fiction.

[ASB]

Hmrc have guidance on their site which suggests in a one man operation it should be accepted. Bim46035.

Question becomes whether the overall package is excessive. For a one man operation it would be hard to argue it is if the enterprise is still profitable over time.

[iguy2008]

Hi

I spoke to my accountant again and I think he is operating on the principle that as long as the contributions dont result in zero corporation tax for the year, then the amounts are ok. The problem is that it hard to backdate any payments based on that principle.

Id doesnt feel like the warchest is part of the equation at all.

Another responder asked if it was an existing pension and the answer is yes.

Regards - Iguy

[WordIsBond]

There's somewhat limited benefit to putting money into a pension in excess of your profit for the year. If you do that, you already paid corporation tax on that money. So why not leave the money in the company? If you put it into a pension, it is tied up until retirement.

If you leave it in the company until retirement, you can take it as dividends with presumably a pretty small marginal tax rate. Or perhaps get it out of the company using ER and pay capital gains tax on it, when you retire.

It makes lots of sense to reduce corporation tax by having your company pay pension contributions, but once the CT is paid and it is retained profits, I'm not sure it makes that much sense. I personally would cap pension contributions at the amount of your profit for the year, even if you could do more. And if I had an accountant I liked and trusted, and that made him nervous, perhaps I'd do £5K less so I had a little bit of profit to make him happy. If it were "Be Nice to Your Accountant Week", anyway.

[iguy2008]

There's somewhat limited benefit to putting money into a pension in excess of your profit for the year. If you do that, you already paid corporation tax on that money. So why not leave the money in the company? If you put it into a pension, it is tied up until retirement.

If you leave it in the company until retirement, you can take it as dividends with presumably a pretty small marginal tax rate. Or perhaps get it out of the company using ER and pay capital gains tax on it, when you retire.

It makes lots of sense to reduce corporation tax by having your company pay pension contributions, but once the CT is paid and it is retained profits, I'm not sure it makes that much sense. I personally would cap pension contributions at the amount of your profit for the year, even if you could do more. And if I had an accountant I liked and trusted, and that made him nervous, perhaps I'd do £5K less so I had a little bit of profit to make him happy. If it were "Be Nice to Your Accountant Week", anyway.

Hi

My thinking is:

(a) Its better to put the money in a pension that leaving it a company account at 0% growth as Im hoping (long term) that pension growth will be better.
(b) Dont have to worry about the 75K FSCS limit if the bank had an issue.
(c) My understanding is that that in the event that pension contribution outwieghed the profit that this difference could reduce my corporation tax (ie be carried forward) for upto 2 years.
(d) Im quite late in starting a pension so would like to catch up in case the chancelleor changes the rules on budget days as mentioned in another thread.

From my reading, its generally that backdating contributions is a good thing to do.

My current gig ends at end of March and renewal is unlikely at present so I thought I would put as much in the pension as I can before considering the ER route (not decided on that yet)

Thanks - Iguy

[SueEllen]

There's somewhat limited benefit to putting money into a pension in excess of your profit for the year. If you do that, you already paid corporation tax on that money. So why not leave the money in the company? If you put it into a pension, it is tied up until retirement.

If you leave it in the company until retirement, you can take it as dividends with presumably a pretty small marginal tax rate. Or perhaps get it out of the company using ER and pay capital gains tax on it, when you retire.

The problem is no one knows what will exist with dividends and ER in years to come. Dividend tax is likely to be increased.

It makes no sense for governments to attack pension savings until people start withdrawing them as if they do they kill a large proportion of the investment industry.

It makes lots of sense to reduce corporation tax by having your company pay pension contributions, but once the CT is paid and it is retained profits, I'm not sure it makes that much sense. I personally would cap pension contributions at the amount of your profit for the year, even if you could do more.

While I agree it makes no sense to cap the profit for the year due to the wider implications.

And if I had an accountant I liked and trusted, and that made him nervous, perhaps I'd do £5K less so I had a little bit of profit to make him happy. If it were "Be Nice to Your Accountant Week", anyway.

I would change accountants.

I know a couple of people who were dumped by their "trusted" accountants when HMRC decided to do simple investigations. Unfortunately these people didn't have tax investigation insurance. Luckily for them they managed to find another accountant who knew how to handle it.

[WordIsBond]

(a) Its better to put the money in a pension that leaving it a company account at 0% growth as Im hoping (long term) that pension growth will be better.

Isn't this a false dichotomy? You could invest it within the company in just about anything you could do within a pension.

(b) Dont have to worry about the 75K FSCS limit if the bank had an issue.

See above. I certainly wouldn't advocate leaving it all in the bank earning nothing.

(c) My understanding is that that in the event that pension contribution outwieghed the profit that this difference could reduce my corporation tax (ie be carried forward) for upto 2 years.

This, on the other hand, is sound reasoning. In fact, you can carry losses back and recover CT paid in the prior year, I believe. This is the kind of thing that sounds like it might be scaring your accountant, but it is legal.

(d) Im quite late in starting a pension so would like to catch up in case the chancelleor changes the rules on budget days as mentioned in another thread.

Well, it can't hurt, but as I've said elsewhere, the chancellor may change the rules for individuals on budget day, but it is extremely unlikely he'll do so with immediate effect for corporate contributions. It's either going to require changes to payroll software (can't do that immediately) or throwing a bunch of people into self assessment, probably not something he wants to do.

But if you want to make contributions anyway, doing so before budget day won't hurt anything anyway.

My current gig ends at end of March and renewal is unlikely at present so I thought I would put as much in the pension as I can before considering the ER route (not decided on that yet)

Hmm. Want to think carefully on this.

Money in a pension is taxable when it is taken out, at ordinary tax rates based on your entire income. Money taken out of the company through ER is taxed at 10%, and then it is yours, not to be taxed again (though income on investment outside of ISAs would be, of course). You might end up paying far more tax by putting money into a pension through your company if you end up going ER. A better route would probably be to take all the money through ER and then contribute it to a pension personally. That way, it offsets your taxable income in whatever you do once your contracting is done.