Paying into a pension from LtdCo - Have I got this right?

[SimonMac]

I am a director and take a salary of £12,000 this is sacrificed for child care vouchers to the maximum £2,916 leaving £9,084 or £757 a month.

I want to start paying into a SIPP, firstly I am told that I can only pay into a pension upto my salary each, would this be the £12,000 limit or the £9,084?

Secondly I assume I have to have a regular payment each month, rather than just waiting to see how much I have left in the company at the end of the tax year and firing as much as I can in. If for example I was then to transfer a nominal £100 from the LtdCo's account does the 20% Government Relief come in the for of the savings in Corporation Tax? But if I were to pay it from my personal account the £100 becomes £120? I assume if I keep below the NI limits its makes no difference which way round to play this.

Pay From Ltd

£657 Gross Salary
£675.42 Tax allowance
£0 Tax Due
£2.92 Employee's NI
£4.55 Employers NI
£654.08 Ney Pay
£100 in Pension

Pay From Personal

£757 Gross Salary
£675.42 Tax allowance
£16.32 Tax Due
£14.92 Employee's NI
£18.35 Emoplyers NI
£725.76 Net Pay with £100 to pay
£120 in Pension

So looking at it there is a small benefit paying it direct from the LtdCo, but what would happen if I make it non contributory, would my BIK go up by the value of what ever my company is paying into my pension?

[Clare@InTouch]

Talk to an IFA to get a full view.

My understanding is that the earnings limit only applies to personal contributions. If you're paying direct from the company it's an employer contribution, and then limited by the annual allowance of £50,000 (there are rules regarding carry back, if you want to pay in more). There is the view that paying a large amount could be seen by HMRC as not trade related, and CT relief refused. I've not seen this happen in practice, but that's not to say it couldn't.

If you pay personally then your basic rate tax band is increased to give you 20% tax relief, but you won't get any benefit from that unless your income exceeds that level.

Either personally or via your employer, it can be lump sum payments rather than regular amounts. You just need to make sure you pay it in the tax year you want it in.

[IR35 Avoider]

You should make employer contributions. In almost all circumstances they as tax-efficient or more so than personal ones, and they immunise that chunk of earnings from IR35. (If personal contributions are made out of salary, they are not immune to NI, if made out of dividends they are not immune to IR35. Company always immune to both.)

Your salary does not matter, the limit is £50,000 each year. (But if you haven't hit the limit in the previous three years you can bring forward the unused allowance, so if you've contributed nothing previously the effective limit this year would be £200,000.)

You do not need to make regular contributions, and should not. Make single contributions either monthly, quarterly or annually. You only make them after you know what you've invoiced and so are able to calculate what you want to contribute.

If you set up regular contributions, not only can you not easily adjust from one month to the next, but the pension provider has an obligation to report you to HMRC if you don't pay as expected, in case you (as an employer) are trying to diddle you (as an employee) out of your pension. (This is my long-winded way of pointing out that regular contributions are for permies.)

[IR35 Avoider]

There is the view that paying a large amount could be seen by HMRC as not trade related, and CT relief refused. I've not seen this happen in practice, but that's not to say it couldn't.

When unlimited pension contributions became allowed in 2006 there was some FUD spread by HMRC that large contributions could be a problem. I paid close attention to this issue and the final verdict (after a year or two and after some HMRC clarifications) was that there should be no risk of disallowal for a contractor whose total remuneration was less than the fees he was generating. Total remuneration (salary+pension) that is less than or equal to fees brought in is not excessive, and the split between salary and pension was not to be a reason for objecting to a remuneration package. (HMRC had earlier implied that it might be.) Unfortunately this was all so long ago that I can't quote references, though earlier posts of mine on this topic might have links.

(It is possible that the remuneration of a non-fee generating spouse could be deemed excessive though, and CT relief lost.)

[Acme Thunderer]

If you set up regular contributions, not only can you not easily adjust from one month to the next, but the pension provider has an obligation to report you to HMRC if you don't pay as expected, in case you (as an employer) are trying to diddle you (as an employee) out of your pension. (This is my long-winded way of pointing out that regular contributions are for permies.)

But in this case are you not a permie - A permie employee of YourLTD?

I take the opposite view to IR35Avoider. MyLtd is a business and should behave as a business. Businesses make regular contributions to their employees pensions. In my case MyLtd makes regular contributions for my pension with extra contributions if things are going well. I also allow for the regular pension contribution when assessing the warchest.

[Moscow Mule]

But in this case are you not a permie - A permie employee of YourLTD?

...MyLtd is a business and should behave as a business. Businesses make regular contributions to their employees pensions. ...

Most contractors I know don't have a contract of employment with their Ltd.

My business is in the business of keeping it's only income stream (i.e. me) happy.

My Ltd makes an annual payment to my pension plan.

[Contreras]

SimonMac,

Absolutely everything what IR35 Avoider said ^^.

Use company contributions direct to the SIPP provider, max £50k per tax year.

Pay it all in one lump sum if you wish, call it an annual 'bonus' if you like, once profit is known.

Also why £12k salary? Optimum is usually ~£7.5k salary, dividends up to high rate threshold, then company pension contributions after that. Don't forget the ~£11k ISA allowance you have as well, generally preferable to use this up before considering the SIPP.

A few links supporting what IR35 Avoider said (from my own bookmark list):

HM Revenue & Customs: BIM46001: Specific Deductions: Registered Pension Schemes

Specific deductions: registered pension schemes: wholly & exclusively: controlling directors & shareholders

'Wholly & exclusively' rule is limited - HMRC | PCG

(It is possible that the remuneration of a non-fee generating spouse could be deemed excessive though, and CT relief lost.)

Also to note that if there is more than one fee earner then HMRC could also look at the relative remuneration packages in any determination. So unless it's just you as sole director/fee-earner then perhaps best to seek specialist advice.

HTH.