IR35 - offsetting pension contributions

[rootsnall]

Correct, a SIPP funded from the company is IR35 proof money.

There has got to be a catch

[Fred Bloggs]

There has got to be a catch

In this case, nope. No catch believe it or not.

[ASB]

In this case, nope. No catch believe it or not.

Except for "wholly and exclusively for the purposes of trade" (though I don't believe that is a real risk hence my question to the OP about WHY they were apparently disallowed).

[Fred Bloggs]

Except for "wholly and exclusively for the purposes of trade" (though I don't believe that is a real risk hence my question to the OP about WHY they were apparently disallowed).

Yes, I believe the danger of being disallowed for the kind of sums the typical contractor is talking about has gone away really. For most of us we'd be talking less than £50k contribution in a year from the Ltd Co at the very tops, I'm guessing.

[centurian]

I've not read up on IR35 for ages, wasn't there a 5% limit on expenses !? I guess it's one to ask the accountant ! I don't intend declaring myself inside IR35 but if I am paying the majority of my income into a pension then it would be good to know that any investigation would be virtually a waste of time for the IR. I think I'll only pay about 10K in divi's this year, so I guess they be chasing 2K approx.

Employers pension contributions come out first - before the 5% calculation is applied. If I recall correctly, the rough ordering for working out IR35 is as follows

Company pension contributions
Indemnity insurance
Travel and subsistence (should still allowable under IR35)
= Gross deemed amount
5% cropped off - pays company expenses - anything left can be taken as dividend
= Sub total
Employer's NI
= Deemed payment
Employee pension contributions (if you really, really want to pay as a person)
= Taxable salary
Employee's NI
Income tax
= Net employee salary


HMRC's own IR35 deemed payment calculator has a section for pension contributions...

[wurzel]

On what basis were the contributions disallowed relief? Yes, personal contributions are limited, however the basis for disallowing company contributions in general is that they were not wholly for the purposes of trade. Provided they were genuine company contributions, not the company making personal contributions on your behalf then there would normally be no reason to disallow them. Recent revenue guidance (which has been posted up several times) seems to make this quite clear.

If your accountant decided to simply disallow them on the basis the exceeded 100% of salary then they may have done you a disservice. You still have the opportunity to correct this.

They weren't disallowed, it's just that I had large NI/tax bill at the end of the year. It's more a matter of not having a good enough handle on my finances. If I'm in IR35 I'd like to have a better idea of how much I can stick into my pension, how much to set aside for tax/NI and how much to pay myself. I guess an accountant should be able to set up a payroll for me? Mine's just useless. Ok with my annual company accounts and things but useless otherwise. Trouble is, I've had 2 before him and they were awful too. Tempted to set up a payroll and do it myself, can't be that hard.

[ASB]

They weren't disallowed, it's just that I had large NI/tax bill at the end of the year. It's more a matter of not having a good enough handle on my finances. If I'm in IR35 I'd like to have a better idea of how much I can stick into my pension, how much to set aside for tax/NI and how much to pay myself. I guess an accountant should be able to set up a payroll for me? Mine's just useless. Ok with my annual company accounts and things but useless otherwise. Trouble is, I've had 2 before him and they were awful too. Tempted to set up a payroll and do it myself, can't be that hard.

In IR35 here's my idea of the extreme:-

Bill 100k.
Less legitimate expenses: 0 (for ease)

Salary 6k (to use allowances) Tax NI required NIL

Nominal Gross profit 94k
COMPANY pension contribution 94k.

Then the P+L shows gross taxable profit of 0 and thus no CT.

Personal income is still the 6k net.

If you are of an age where immediate vesting is a possibililty you could take 23.5k as the tax free lump some and leave the balance in fund for drawdown.

But, the pension is not "tax free" of course (save for the 25% lump sum allowed), it is really just tax deferment since however you eventual take the income it is taxable.

[centurian]

But, the pension is not "tax free" of course (save for the 25% lump sum allowed), it is really just tax deferment since however you eventual take the income it is taxable.

Or double taxed for very high earners - now that higher rate relief is capped. They will effectively pay 20% tax on the way in, but probably have to pay 40% tax to get it out

[rootsnall]

But, the pension is not "tax free" of course (save for the 25% lump sum allowed), it is really just tax deferment since however you eventual take the income it is taxable.

All things considered though it is a good deal for somebody who is within striking distance of 55 and can afford to live off mostly savings for a few years. With the added bonus of you are effectively IR35 proof while not paying any NI.

[rootsnall]

Or double taxed for very high earners - now that higher rate relief is capped. They will effectively pay 20% tax on the way in, but probably have to pay 40% tax to get it out

I can't see many of us having a pot big enough to pay higher rate tax. It would have to be 500K+.