IR35, Short term SSAS pensions

**LisaContractorUmbrella** · 27 June 2012, 11:51

If you're inside IR35, whether working through your own Ltd or an umbrella you must receive payment through PAYE. Either way there is no reason why you can't put money into a pension - however, there have been many changes to the tax laws surrounding pensions over the last year or so - I would take advice from a good IFA (we work with an excellent company - if you would like their number PM me)

**Hex** · 27 June 2012, 11:52

Not quite sure what an SSAS pension is, but ....

If you have your own limited company, you can put up to 50K per year into a Pension. It is quite tax efficient, especially if you are caught by IR35. Given your age/situation etc. it would seem a reasonable approach to do this.

I have a SIPP and I just pay one-off ad-hoc payments into this from my company. The SIPP provider is informed that is is a company payment and therefore they don't try to reclaim tax on it (as it has been paid from pre-tax company income). It is eligible for the 25% tax free lump sum and you can either use the rest to by an annuity or else take cash from the pension in form of a drawdown every year.

**Hex** · 27 June 2012, 11:58

Reducing the IR35 pain with a contractor pension

HM Revenue & Customs: IR35: Countering Avoidance in the Provision of Personal Services - FAQ's

**IR35 Avoider** · 27 June 2012, 12:03

Originally posted by smokie View Post

I expect I need professional advice but...

I have a contract which could last a while, and would probably come under IR35. Let's assume it pays £100k a year. Also assume I only need modest annual income. And a fact is that I am 57, and while I would like to retire early, my normal retirement age is 66. I have modest pensions already from years of working as a permie, which I could, but don't really want, to take early.

I don't want massive HMRC liability at some point in the future just because I have exploited all the loopholes in this contract, but want to maximise my "take". So...

Let's then assume I pay myself a realistic salary (say £25 - £30k), fully under HMRC rules.

No need to lower salary if the rest of the money is going into pensions. If you are the person bringing money into the company then any amount of remuneration up to the amount you bring in is OK, and HMRC don't care how remuneration is split between salary and pension.

What to do with the balance, to minimise tax, but without exploiting soon-to-be-shut loopholes and other risky ventures - I want a sort of "Jimmy Carr moral" approach.

I've been reading about SSAS pensions which appear efficient as you can invest up to £50k a year.

So, putting aside scheme costs and possibility of "investments going down as well as up" why would I not put the full £50k in?

I think SSAS is an obsolete type of pension. At one time it allowed you to put more in than other types of pension, but that is no longer true. It is much more complicated and expensive to set up than a SIPP and there are no longer any advantages I'm aware of.

You may be able to put more than 50K in for a few years, if you've put less than 50K in during the previous 3 years your unused allowance can be carried forward. So if you've put nothing in previously you could put 200K in the first year, and 50K a year thereafter.

Note that your company should make employer contributions to the pension. Personal contributions are limited to 100% of salary.

Do I need to state when I intend to start taking my pension at start up? I assume I could make this 60, or 62. Then at that time take 25% of the pot value as a lump sum, then the rest as a pension (quite how that bit works, I'm not sure - I guess you buy an annuity with the pot).

The concept of a pension date has no real meaning in a defined contribution pension. You can start taking the money whenever you want provided it's not earlier than age 55. If the scheme ask for a date it's probably only so they can send illustrations of what your pension might be worth then.

I could be wrong, but since you are over 55 I think you could effectively take your pension immediately, with an immediate vesting pension.

For example, if you earn 100K and want to avoid IR35 issues by paying 95% as remuneration, then
- 5K is spent on company running costs, dividends and corporation tax
- 7K as salary
- 88K into personal pension (until you are constrained by the 50K limit)

Out of the 88K into pension
- take 22K immediately as tax-free lump sum
- 66K invested from which you can immediately start taking income, though you don't have to take income if you don't need it. You don't have to buy an annuity, you can simply take money out of your investments.

You can repeat this process for as many years as you keep working, though once you've used up any backlog of unused pension tax relief the amount going into the pension would have to fall to 50K and the gross_salary+employer_NI bill would rise to 45K.

Or I could carry on winging it, and hope HMRC doesn't catch up with me - but I think we will all see a marked increase in successful investigations in the next couple of years.

Or I could pay myself a full salary as though an umbrella, and just save whatever I want from net pay - but this would suffer enormous reductions from tax.

Or I suppose I could leave the money in the company and continue to pay myself when I have no income - but that still leaves the potential liability for this year.

Give your other options you would have to be 100% certain of non-applicability of IR35 for this to be a good route, which you aren't. (IR35, if applied at a later date after an inspection, would mean money left in the company would end up being taxed as salary.)

**bananarepublic** · 27 June 2012, 12:05

Originally posted by smokie View Post

I expect I need professional advice but...

I have a contract which could last a while, and would probably come under IR35. Let's assume it pays £100k a year. Also assume I only need modest annual income. And a fact is that I am 57, and while I would like to retire early, my normal retirement age is 66. I have modest pensions already from years of working as a permie, which I could, but don't really want, to take early.

I don't want massive HMRC liability at some point in the future just because I have exploited all the loopholes in this contract, but want to maximise my "take". So...

Let's then assume I pay myself a realistic salary (say £25 - £30k), fully under HMRC rules.

What to do with the balance, to minimise tax, but without exploiting soon-to-be-shut loopholes and other risky ventures - I want a sort of "Jimmy Carr moral" approach.

I've been reading about SSAS pensions which appear efficient as you can invest up to £50k a year.

So, putting aside scheme costs and possibility of "investments going down as well as up" why would I not put the full £50k in?

Do I need to state when I intend to start taking my pension at start up? I assume I could make this 60, or 62. Then at that time take 25% of the pot value as a lump sum, then the rest as a pension (quite how that bit works, I'm not sure - I guess you buy an annuity with the pot).

Or I could carry on winging it, and hope HMRC doesn't catch up with me - but I think we will all see a marked increase in successful investigations in the next couple of years.

Or I could pay myself a full salary as though an umbrella, and just save whatever I want from net pay - but this would suffer enormous reductions from tax.

Or I suppose I could leave the money in the company and continue to pay myself when I have no income - but that still leaves the potential liability for this year.

Thoughts please...?

Have a look at the following link

Small Self Administered Schemes (SSAS) - The Pensions Advisory Service (TPAS))

So crudely speaking you could pay yourself 50K and put 50K into the pension. Your company could make the contribution and this has the affect of saving the employers and employees NI that would be liable if you had paid your self first (this makes the relief worth around 40% even if you are a basic rate tax payer).

There are rules about how much you can put into a pension, but my understanding there is a yearly limit of 50K which can be boosted by using the unused limit for previous years.

I don't think you can put more in that what you have earnt though in one year.

There is a disclaimer about the company contributions being for the purposes of trade. I am not sure what the rules are around this are now which may limit the contributions, but certainly I have made payments directly into a personal pension from my company - generally all you need to do is tell the pension company that these have been paid gross and so they don't claim the 20% relief. You could also consider a SIPP, it might be a cheaper option.

I would caveat the above as it being my personal opinion, I suggest you get professional advice.

PS. Interesting point by IR35 Avoider, as the 95% of billings is judged as "deemed" salary if you are in IR35 so perhaps you can contribute more - I never ticked the IR35 box.

**ASB** · 27 June 2012, 14:48

There is some flexibility to "bring forward" unused contributions from earlier years. It'son HMRC website. It is quite limited.

As mentioned if over 55 25% immediately can be taken out as cash TAX FREE.

Also from a point of view of investment risks there are plenty of options. You could leave it in cash, invest it in a cash deposit type of fund, buy gilts (though the price will vary according to long terms yields).

Drawdown rules are a little complex and worth a look at to ensure you can be getting it back fairly quick but do remember that income produced after the tax free 25% is just income for tax purposes (but doesn't get you NI'd).

I've wondered about the following but think it would probably fail the drawdown rules (though it might be OK after a few years when there is enough in the pot to satisfy the drawdown limits).

-> Earn 100k.
-> Pay 50k salary
-> Pay 50k into pension

-> Take 12.5k tax free
-> Take 37.5k taxable

In this scenario you would:-

Pay no tax on 12.5k
Pay tax only on 37.5k
Pay tax and ni on 50k

A substantially better result than tax and NI on 100k. [Though leaving the cash in the pension to take when not working would be a more tax efficient route if you don't need the money for day to day stuff].

Carry forward rules, check with any provider how they apply to your specific situation:
http://www.hmrc.gov.uk/pensionscheme...-forward.htm#3

Drawdown tables:
http://www.hmrc.gov.uk/pensionschemes/gad-tables.htm

**smokie** · 27 June 2012, 15:46

This is really useful stuff, and confirms to me that it is worth me paying for professional advice - not because I don't trust you all, but because it appears to be a viable option. Thanks all.

I just wonder if a good IFA would understand the company/personal tax/IR35 implications, or an accountant would understand the SIPPs stuff. Guess I'll find out :-)

And there has to be a fairly complex calculation around salary/corp tax/pension/PAYE & NIC etc etc - but this certainly seems a viable option. Immediate thinking is that I dump as much as possible into a pension from the company (i.e. not personally), as broadly that seems to reduce tax liability all round, and pay myself a modest salary.

My current contract could last 18 months but who knows after that? And I said could...

**IR35 Avoider** · 28 June 2012, 08:32

Originally posted by ASB View Post

I've wondered about the following but think it would probably fail the drawdown rules (though it might be OK after a few years when there is enough in the pot to satisfy the drawdown limits).

-> Earn 100k.
-> Pay 50k salary
-> Pay 50k into pension

-> Take 12.5k tax free
-> Take 37.5k taxable

In this scenario you would:-

Pay no tax on 12.5k
Pay tax only on 37.5k
Pay tax and ni on 50k

The taking of the 37.5K (and investment growth on it) is spread across the rest of your life, whether its taken as drawdown or as income from an annuity. I'd guess you could take in the region of 4% of it in the first year, if aged 57. You can only take it immediately if you already have annuity income of something like 20K (can't be bothered to look up the exact amount) and to have that at age 57 would probably have cost you (according to my wild guess) of the order of £500,000, so fairly unlikely anyone is in this position. (You wouldn't want to buy an annuity at such a young age anyway. Generally I think annuity purchase should be postponed to your 70's.)

**IR35 Avoider** · 28 June 2012, 08:41

Using this calculator

GAD Calculator

It appears a 57 year-old (man) can currently take 4.5% from their pension investments via drawdown.

Edit: just to clarify, the 4.5% is the maximum taxable annual income a 57-year old male can take from all remaining pension investments, after having already taken 25% tax-free. The percentage generally increases with age, but also depends on interest rates. The calculator shows that the 4.5% figure was based on a current interest rate of 2.25%.

IR35, Short term SSAS pensions