Pension contribution creating substantial loss - is this an issue?

[BobbyBob]

Can my company make a sudden and large pension contribution which takes the company into a loss? Assuming I keep the company solvent.

Imagine this scenario:

Earlier in the financial year I declared a dividend, while there was plenty of profit available, as I normally do every year.

For some 20 years i have been doing without any pension contributions in order to invest in the company and to buy a commercial property which will ultimately go into my personal pension.

6-9 months after the dividend it's year end and assessing all factors it now makes commercial sense to transfer the property to my pension. I make substantial pension contributions (say £120k) using up my past 3 years allowance, putting the company into a loss which I can now offset against Corporation Tax, and allowing the pension to buy the property at its true market value.

To keep the company solvent i convert some of my director's loan into equity. Trading conditions are good so I expect to be able to convert it back in due course.

On my accounts this would give the misleading impression that the dividend was unlawful, so I add a note to my accounts pointing out that the company was in plenty of profit at the time the dividend was declared.

I'm sure this is fine so far. But... Are there any grounds by which the pension contribution could be deemed excessive? Obviously £120k is a lot in one go but I think this is a reasonable contribution for somebody who has gone without pension contributions for the past 20 years in order to invest in getting a business up and running. Now I'm nearing retirement age it's reasonable for me to start moving my investment into a pension quite quickly. If anything, the HMRC has gained by my actions because my investment has not had the benefit of a tax efficient shelter for the past 20 years.

Can the conversion of the directors' loan to equity, or any other part of this arrangement lead to the HMRC challenging the validity of the large pension contributions; such as that they take the company into a loss, or they're not being made out of earnings? I think this is fine because it's simply making a pension contribution which creates a loss; which will be offset against future profits.

[WTFH]

What does your accountant say?

[Fred Bloggs]

What does your accountant say?

Hmmm, agreed, that all sounds just a tad too messy to me.

[northernladuk]

What are you doing for a warchest?

[Zylon]

I have heard that to carry forward contributions up to the 3 year, £40k per year limit, you need to have been a member of a pension scheme during the years whose allowance you wished to carry. I would take this as meaning a SIPP (or earlier equivalent) had to be open during that period. If you didn't, it could be problematic.

[Fred Bloggs]

I have heard that to carry forward contributions up to the 3 year, £40k per year limit, you need to have been a member of a pension scheme during the years whose allowance you wished to carry. I would take this as meaning a SIPP (or earlier equivalent) had to be open during that period. If you didn't, it could be problematic.

Correct. But it can be any pension scheme, whether you contributed to it or not, it just has to have been open, also it doesn't have to be the one you want to contribute to today.

[Darren at Fox-Bartfield]

Pensions

I'd suggest a chat with both your accountant and financial adviser on this as too much detail to cover in a forum post. Appears that a robust pensions strategy is needed depending on what you're looking to achieve, age, etc so a sit down or indepth discussion would be recommended.

As one of the guys has already mentioned, what have you in terms of warchest kept back for a rainy day?

[ClaireGreystone]

Pensions

Hi. I am a financial advisor. I frequently do pension contributions of this size for my clients and have never had a problem. There are 3 potential issues:

1. As somebody stated above, you need to have had some sort of pension scheme running for the previous three tax years as a minimum (even if it's an old pension you haven't touched for years), in order that you haven't exceeded the annual allowance.

2. if your income has gone above the £150k threshold, the amount you can contribute can be restricted.

3. As with any business expense, tax relief is granted at the discretion of HMRC and they need to be satisfied that the contribution was made "wholly and exclusively for business purposes". HMRC states that if you are a controlling director (which it sounds like you are), then "it is unlikely that there will be a non-business purpose for the level of remuneration package". i.e. if it is your company then there is unlikely to be an issue with large pension contributions, particularly when you haven't been paying into a pension for some many years.

In terms of the pension contribution creating a loss, there is no issue with this, but usually the loss would then be offset against last years' profit and you could therefore claim back the corporation tax from last year. But this is more an accountants remit.

Hope this helps.

[gizzmo]

I can confirm I have paid myself max £40k pension contribution in a year which took me into a loss, with my accountants assistance this was offset against previous year's corporation tax because i was closing down the company, and got a tax refund with HMRCs blessing. My accountant did advise though that if I wasn't closing the company, I could have simple carried the loss forward and offset it against the next years corp tax instead.

[craigy1874]

I can confirm I have paid myself max £40k pension contribution in a year which took me into a loss, with my accountants assistance this was offset against previous year's corporation tax because i was closing down the company, and got a tax refund with HMRCs blessing. My accountant did advise though that if I wasn't closing the company, I could have simple carried the loss forward and offset it against the next years corp tax instead.

You could also have carried it back if you were continuing to trade.

My advice is always to generate a repayment asap rather than carry it forward and receive relief for it in a further 21 months...