How much do you pay into a pension?

[IR35 Avoider]

I wouldn't say that paying contributions out of fees "cannot possibly" be considered excessive. I would have thought that, for the reasons you cite, it would be unlikely, but I can certainly envisage a scenario whereby an over-enthusiastic Inspector would seek to disallow an element of your contributions on the basis that the company "should make a profit", albeit I acknowledge and personally agree with what you say regarding the parallels with IR35.

I don't think there is any definitive answer on this one as it is too soon for there to be any caselaw but I would probably personally be slightly more cautious than you and draw out as much as you can as a tax-free dividend (if anything, depending upon your other income obviously).

Whilst HMRC have issued guidance on this matter, from memory again it is not definitive.

PUMA

I agree with what you say, there is plenty of room for them to start an argument. I'm just farily confident of winning, especially with help from PCG specialists.

I saw in one of their on-line manuals that individual inspectors are not supposed to challenge contributions, they are supposed to refer the issue to a central unit. I take this to mean that they realise the area is a minefield. It can't have been the intention of the legislation to make it much harder for owner-directors to build up a pension than anyone else, nevertheless an aggressive interpretation of "wholly and exclusively" would have that effect. If an arms-length employer (e.g. an umbrella company) paid contributions of the same size there would be virtually no risk of it being seen as uncommercial. There would be no question in the inspectors mind as to whether the payment was governed more by the interests of the employer or those of the employee.

As for the company making a profit, I declare all my fees as IR35-caught, so my pension contributions in no way reduce the profit. If I reduced them it would simply mean paying an increased (or deemed) salary. (When I said the rest above 5K goes to pension, I mean the rest up to 95% of fee income, I was oversimplifying slightly.) This looks to me like a cast-iron defence against any objection to the size of the remuneration, so I think the argument would be about whether there was a non-trade purpose for the split. The problem is, it's blindingly obvious there is a non-trade purpose, in the form of tax savings, but that applies to every employer contribution, so the test can't be as simple as that. I think the test has to be whether the company has incurred expenditure it needn't have to achieve it's purposes. Of course in an owner managed company, any expenditure on salary or pensions falls into that category. Since they stand to get all profits anyway, reducing profit by giving themselves any salary or pension at all could arguably be uncommercial spending. That is a ridiculous but rational interpretation of the rules. This is why I say the whole area is a minefield.

What would happen if the company had no money to pay a larger than expected Corporation tax bill? I don't think the director could be faulted for failing to anticipate the situation, and in his capacity as employee it would be entirely reasonable to offer his future services to clients through a different service company, one that could pay him more because it wasn't saddled with a large debt.

[ASB]

I'm 48 now so will be able to get some at 50....


Thanks for your help

You might want to look at a thing called "immediate vesting" which may be appropriate. Here you make a pension contribution, get the tax relief, take the 25% lump sum, convert the balance into an annuity. Depending on your individual tax position this can sometimes be useful.

Contribute 2808, upped to 3600 through tax relief, 900 tax free cash, so actual cost 1808. Leaves 2700 for an annuity, @ 6.5% at age 50 gives 125 p.a.

[IR35 Avoider]

You might want to look at a thing called "immediate vesting" which may be appropriate. Here you make a pension contribution, get the tax relief, take the 25% lump sum, convert the balance into an annuity. Depending on your individual tax position this can sometimes be useful.

Contribute 2808, upped to 3600 through tax relief, 900 tax free cash, so actual cost 1808. Leaves 2700 for an annuity, @ 6.5% at age 50 gives 125 p.a.

Earn 100K, use 5K for company expenses, profit and corporation tax on profit, 5K for salary, 90K into immediate vesting pension, 22.5K immediate tax-free income, 67.5K producing an income for life which is taxed at the basic rate.

The only downside is that it means you're still contracting at an age you're allowed to draw your pension. (55 for me.)

You can see why this might upset a tax inspector, even though the rules allow it, so join the PCG so they can argue on your behalf, if necessary.

(Actually I'm not certain if an immediate vesting pension can be contributed to be an employer, but I don't see why not, it's just a slightly speeded up version of what you can do anyway by contributing to a pension then taking benefits.)

Edit: After doing some googling, can't find anything that says an employer contribution can be made. Never mind, just set up a new pension each year, contribute to it through-out the year, convert it into tax-free lump-sum plus income the following year.

[xoggoth]

As Dim says, annuity rates (about 6% on £100k at best currently and that's without any guarantees, payback or index linking) are not good and likely to get worse as old farts accumulate. On the other hand, a company payment is free of NI and not just tax like a personal ISA would be. Probably the sort of calc Excel is good for.