£160k pension contribution including previous three years: is this a problem?

[OneManBand]

I have just opened a SIPP account. My accountant had previously said that my company can make not only the max £40k contribution to my pension this tax year, but also a £40k contribution for each of the previous three tax years, making the total contribution a massive £160k.

That got me all fired up, so I set up the SIPP and just asked him one last time if it’s OK if I now transferred the £160k to the SIPP account.

Background info:

• All of the £160k would come from my retained profits, not from the trading profits this year.
• I take a small salary (c£8k pa) and a larger dividend (c£30k).
• The company turnover is c£100k.

The accountant has now made an about turn and said this (I paraphrase):

For the company to get tax relief against its profits any cost it makes has to be wholly and exclusively for business purposes. It’s normal for companies to pay pension contributions to their Directors. However it is not normal for a company which is paying a salary of £8K to a Director to then pay £160K as a pension contribution.

HMRC may see that as excessive and driven by the desire to avoid corp. tax. Pension contributions should be paid to Directors as part of their remuneration package. Clearly as things stand you are underpaid for the work you do. I would suggest commercially the work you do is worth more like £90K given the company’s turnover of around £100K per year, so it could be argued that if the salary and the pension contribution combined were at that sort of level it commercially stacks up and so at least half of the £160K payment would be fine for corporation tax relief. Whether HMRC would allow the rest of the £160K payment for corporation tax relief is debatable.

No-one will stop the contributions from going into your SIPP scheme as they are within the maximum range.

In addition, he is urging me to see an IFA:

I suggest you use an IFA to do this with you. They would have a view on how a payment of this level will be viewed by HMRC too as they come across it in practice more than I do.

Is he right, or do I need a new accountant? If it’s the latter, please can anyone suggest a competent accountant who is used to dealing with these kind of arrangements?

It's possible that he didn't realise that the £160k is coming from my retained earnings, not from current year's profits. I have clarified that and he hasn't come back yet, but is his general position right about low salary and high pension?

[Lockhouse]

I don't see an issue here but possibly you might want to pay an iFA for half an hour to clarify your strategy.

If you've not used any of your past three years allowance you could pay 80k for this and the next two years instead. Assuming you have reasonable company earnings the corp tax is deductible every year. For me this is the biggest reason to have a SIPP.

[Fred Bloggs]

To be clear, in principle there is no problem with your proposal that I can see. But to check -

1 You HAVE been a member of a pension scheme (any pension scheme will do) for those three and the present year?

2 You have not paid anything else into any of the pension schemes in any of those years?

If the answers are Yes and No. Then you should be fine. No need for an IFA on this at all. There are many simple guides you can down load that explain all this in simple language. Hargreaves Lansdown have a good one you can download for free. FWIW, I was in the same situation as you, I made 2x GBP 80k company SIPP contributions over a two year period, I think it is a good way to go and may just help stay under the radar. One final thing is to make sure you document everything properly and tuck it away because if Hector comes knocking he will want to see a full justification for what you did. There is, however, no need to notify anyone, just keep your own records in case of inquiry. Finally, make sure your SIPP transactions are declared clearly to your SIPP provider as company contributions. Then they will not accidentally try to reclaim income tax from HMRC by mistake. HTH.

[OneManBand]

To be clear, in principle there is no problem with your proposal that I can see. But to check -

1 You HAVE been a member of a pension scheme (any pension scheme will do) for those three and the present year?

2 You have not paid anything else into any of the pension schemes in any of those years?

1. I only have had an old staff pension from when I was a permie. I haven't paid into that scheme since 2009. I have had no other pension scheme until I opened the SIPP this week.

2. Correct, not paid into anything.

[Fred Bloggs]

1. I only have had an old staff pension from when I was a permie. I haven't paid into that scheme since 2009. I have had no other pension scheme until I opened the SIPP this week.

2. Correct, not paid into anything.

To me, that seems like a Yes and a No. Seems you're good to go, but please do take heed of the other stuff I mentioned, for your own good.

[northernladuk]

I didn't think you could pay in to a SIPP for years prior to it being opened? Doesn't seem to make sense to backdate payments in to a plan you didn't have then.

[craigy1874]

I have done this for my clients and would always argue with HMRC (if necessary) that all you have done is pay in contributions for earlier years now, instead of in those earlier years.

I mean your accountant is perhaps saying that the whole £160k is a one-year remuneration package. I wouldn't say this, I would say it is a top of your remuneration for the last 3 years, plus the current year.

Who are HMRC to decide how you remunerate yourself?

You are entitled (as a director) to trade for a few years and see how business is before deciding how significantly to remunerate yourself. I would say that you are now comfortable the business is performing well so have decided to effectively backdate your remuneration for earlier years. However, instead of taking this as a salary or bonus, you have asked the company to pay it to your pension scheme.

So from that side of things, I see no problem obtaining corp tax relief.

[TheFaQQer]

To me, that seems like a Yes and a No. Seems you're good to go, but please do take heed of the other stuff I mentioned, for your own good.

That sounds like a no and no to me - the pension plan into which the payment is being made was not active in previous years, so you can't make a payment into it.

I agree with the rest of your post though, I don't think the issue is the amount being paid but whether there was a pension plan in those earlier years.

[Fred Bloggs]

That sounds like a no and no to me - the pension plan into which the payment is being made was not active in previous years, so you can't make a payment into it.

I agree with the rest of your post though, I don't think the issue is the amount being paid but whether there was a pension plan in those earlier years.

This is a definate Yes to me. If you download and read the literature that is in the public domain at the likes of HL, you might agree with me.

I only have had an old staff pension from when I was a permie. I haven't paid into that scheme since 2009

But then again, my advice is worth you pay for it, I guess.

[jamesbrown]

Agree with TF. The scheme had to be active in the prior years to make a retrospective contribution.