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Pension creating a trading loss for the year

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    Pension creating a trading loss for the year

    Hi all,

    Lets say I have retained profit of £500k in limited company and paid approx £30k Corporation tax for past 10 years.

    I havent paid into any pension.

    This trading year I only make £40k retained profit.

    Can i still use the previous years retained profit for the purpose of the limited company £160k pension (Using the previous 3 years carry forward)?

    My accountant advising the retained profit for pension payments must come from the current trading year (Although salary and pensions can be paid from retained profit)

    Any pension payment beyond this years trading retained profit, putting the company into a loss, would result in a fine.

    Any accountants know the absolute decree on this?

    I am looking to close out limited company before moving to a salary position so want to use all my retained profit for pension contribution but not enough trading profits for this company year.

    Seen this on the internet but my accountant (and a 2nd accountant i also asked said this inst true)
    Pension contributions are normally allowable deductions for corporation tax purposes. Since the deductions form part of the company expenses, any trading loss can get relief under the trading loss rules for the company.

    Many directors would restrict making employer pension contributions when the company is making losses as they see this as adding to the losses. But if the loss can be offset against profits of the preceding year or against future profits then making an employer pension contribution could reduce the amount of tax the company needs to pay.

    If a company has paid corporation tax in the preceding period or will be paying corporation tax in future periods, tax relief will be given for pension contributions made wholly and exclusively for the purpose of the trade paid before the end of the accounting period.

    Example
    A company anticipates profits of £20,000 for year ending 31 December 2010. The company had profits of £500,000 for year ending 31 December 2009. The annual pension contributions to directors and employees are £100,000.

    If the company pays the pension contributions then it will have a trading loss of £80,000 for the year ended 31 December 2010. This loss can be offset against the previous year's profits gaining a corporation tax repayment of £23,800 (£80,000 taxed at 29.75%) and no tax due for the year ending 31 December 2010 saving the company £4,200 in 2010 (£20,000 taxed at 21%).

    The overall saving for the company would be £28,000.
    Last edited by Delboypass; 27 June 2018, 16:16.

    #2
    Pension creating a trading loss for the year

    You need to have been in a pension scheme during any year you wish to carry the allowance forward from

    So given you have said you haven’t paid into a pension your question about using retained profits is irrelevant

    Comment


      #3
      Originally posted by Delboypass View Post
      Any pension payment beyond this years trading retained profit, putting the company into a loss, would result in a fine.
      I did exactly that - made a big loss because of putting the maximum 3 years allowance into a SIPP.

      You'll never guess what the Revenue did.

      They put a massive CT rebate into my bank account.

      Nice people.
      "Don't part with your illusions; when they are gone you may still exist, but you have ceased to live" Mark Twain

      Comment


        #4
        Originally posted by zoomfwd View Post
        You need to have been in a pension scheme during any year you wish to carry the allowance forward from

        So given you have said you haven’t paid into a pension your question about using retained profits is irrelevant
        WZFS

        If you don't already have a pension, you cannot use the carry forward.

        Comment


          #5
          Originally posted by Cirrus View Post
          I did exactly that - made a big loss because of putting the maximum 3 years allowance into a SIPP.

          You'll never guess what the Revenue did.

          They put a massive CT rebate into my bank account.

          Nice people.

          Was that following advice from an accountant?

          If yes are they liable for any fines? If no are you worried about any future clawback and penalties if HMRC review your accounts in more detail?

          I suppose they'll get their tax one way or another. With pensions they tax you on the way out and in the meantime have the potential to change the rules to grab their 'fair share' sooner.
          Maybe tomorrow, I'll want to settle down. Until tomorrow, I'll just keep moving on.

          Comment


            #6
            Apologies - missed that part - yes I already have a pension open - just didnt use it for many years stupidly.

            I was more concerned about the trading year limitation and trying to claw back the £160k, CT rebate & taking company into a loss for this trading year.

            Cirrus - your accountant was okay with this and you got CT rebate? What year was this you did it?

            Does anyone have any official Government literature that limited company can make a loss on pension contribution and get a CT rebate beyond the current trading year profits?

            Would be very appreciated.

            Accountant information - Nixon Williams (2 separate accountants):
            Thank you for sending this through. As far as we are aware you can only carry back/forward trading losses providing that your company has a genuine trading loss. Putting into your personal pension from the company would not count as a genuine trading loss.

            I have checked and if you were to pay into your pension from the company and it made your company have a loss you would not get the any relief for the year on the part that took your company into the loss position. You would basically end up with no corporation tax to pay for the year, however, you are unable to reclaim any relief for the previous years or carry forward any relief from the contribution.

            You can only put into your pension, providing this was set up during the tax years you wish to use the unallocated allowances. You will not receive any rebate for corporation tax, as based on the current financial year your company would make a tax loss based on the amount you want to contribute. This means that the contributions are not allowable for corporation tax relief.

            Corporation Tax relief is granted on these payments, provided that they are made ‘wholly and exclusively’ for the purpose of trade. HMRC will accept the contributions are for the purpose of trade if the overall remuneration package of the employee/director is reasonable and the contribution does not cause the company to make a tax loss in any given year. Therefore you could potentially reduce your corporation tax liability to zero. If you did decide to contribute more you would not receive any corporation tax refund and could potentially have a charge from HMRC for the amounts that take your company into a loss position.

            Comment


              #7
              There are a ton of threads covering pension losses on forums already. Might be worth a read to see if your answer is in there. Could also be other stuff you've not considered as well.

              https://www.bing.com/search?q=pensio...d=&adlt=strict
              'CUK forum personality of 2011 - Winner - Yes really!!!!

              Comment


                #8
                Originally posted by northernladuk View Post
                There are a ton of threads covering pension losses on forums already. Might be worth a read to see if your answer is in there. Could also be other stuff you've not considered as well.

                https://www.bing.com/search?q=pensio...d=&adlt=strict
                Thanks

                I have read extensively,done a few searches and spoken to accountants.

                Just looking to see if any accountants on here or anyone able to point to a specific GOV document saying, yes, legitimate. This is the part I am missing.

                I cant see a thread or article that says yes taking a pension can cause a legitimate trading loss and CT claw back or anyone who has been given a slapped paw by the HMRC.

                Comment


                  #9
                  Legislation on carry back of losses for corporation tax: https://www.legislation.gov.uk/ukpga...-total-profits

                  Makes no mention of whether or not the loss is due to pension contributions.

                  HMRC guidance: https://www.gov.uk/guidance/corporat...laiming-a-loss

                  Again, no mention of whether or not the loss is due to pension contributions.

                  Short answer, there is nothing in legislation that excludes losses from pension contributions from being carried back.

                  The bigger question is whether or not they constitute trading losses. Some discussion with different viewpoints here: https://forums.contractoruk.com/acco...y-pension.html

                  In general, I almost always am persuaded by Jessica's responses. In this case, I'm not as sure.

                  I'd decide it this way: Is this a retained earnings dump, or is it deferred pension contributions that you should have been making all along, and you are just now catching up on them? If the former, it really isn't a trading loss. If the latter, I'd argue it is.

                  If only you had minutes from board meetings year on year that you had filed with your accountant at the time, detailing that pension contributions due to the director were accruing and needed to be paid eventually. That would make it easy to claim this was just catching up and is a trading loss.

                  The fact that you are still trading in the current year probably helps you. The fact that you are looking to close the company down probably hurts you.

                  But it's an interpretation thing, and the chances of HMRC pursuing it probably aren't very high.

                  But whoever told you there's a fine for making the pension contribution should be asked to prove it. I don't know of any fine for that. The only question is whether or not you can carry back the loss for reclaiming corporation tax. You certainly can make the contribution and take the loss but not try to carry back the loss.

                  NOTE: If you decide to go for this, might as well be shot for a sheep as for a lamb. Consider Terminal Loss Relief: https://www.gov.uk/guidance/corporat...-income-losses. If you go for that, come back and let us know how it went.

                  Comment


                    #10
                    Originally posted by Hobosapien View Post
                    Was that following advice from an accountant?
                    Of course

                    If yes are they liable for any fines? If no are you worried about any future clawback and penalties if HMRC review your accounts in more detail?
                    Company now dissolved.

                    [When you set out in your car, your basic assumption is you won't have a serious accident. The chances are very low. When you start contracting, the assumption is you won't have the Revenue poking around in your affairs. It happened to me once in over 30 years, and they just took a few grand. I don't know what for. It was just a cost of doing business.]

                    HMRC are only concerned whether you pay the right amount of tax. Pension contributions are an accepted tax-free cash stream, so I can't think why you or your accountant think there is a problem. Go to an IFA if you still have worries.
                    "Don't part with your illusions; when they are gone you may still exist, but you have ceased to live" Mark Twain

                    Comment

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