Pension Contributions and CT relief

[Datta3]

You will want to check this with your accountant, and it may depend on your tax year. But I think if you
A. Have a lot of retained funds
B. Want to make large contributions
C. Act quickly
then it may be to your benefit.

Reasons:
1. It is definitely possible to carry over an allowance from the three previous years, if you had a personal pension account opened during those years.
2. You can contribute up to £40K / year.
3. That means if you have the funds available and made no contributions, and you act now, you can contribute £40K for 2017-2018 and £40K for each of the three preceding years (2014-2015, 2015-2016, 2016-2017). If you made contributions in any of those years, that reduces the amount you could contribute now on a pound for pound basis.
4. If you wait until after 6 April, you lose the allowance for 2014-2015.
5. You have to use the current year before you can use prior years. So to use the 2014-2015 allowance, you have to contribute this year's full allowance plus the 2014-2015 allowance before 6 April.
6. Any contributions reduce your company's taxable profit and thus save 19% corporation tax.
7. If you make multiple contributions for multiple years, it could put you in a loss position for the year.
8. If you have a loss position for the year, you can carry back the loss to the previous year and reclaim Corporation Tax paid in the previous year. Depending on your tax year, that might result in 20% savings rather than 19% savings, because of the change in CT rate.
9. If your loss exceeds your profit from the prior year, the remaining loss would be carried forward to next year.

If you want to use the 2014-2015 allowance, you need to act quickly. Forget the financial adviser, get the money pumped into the pension fund before the end of this tax year. Then, if you need financial advice as to where to invest it, get it, but the main thing is to get the funds into the pension pot before 6 April. You can transfer your pension somewhere else in May or June if you want to. You can't make 2014-2015 contributions then, it will be too late.

If you are going to create a loss for your current tax year, and are able to grab that 20% savings, again, depending on your tax year, this may require acting pretty quickly. If YourCo's tax year runs April-March, this would definitely be the case, you have to act now. 1% isn't a huge difference, but if you make £80K a year profit and you can wipe out last year's profit by carrying back a loss due to your pension contributions, that tax savings is £800. You could enjoy a nice weekend in Paris with your other half for that.

As to the philosophical questions:
1. I suspect HMG will place further restrictions on the tax benefit of making large pension contributions. I expect the annual limit to be reduced to £20K or even £10K in the future. I also expect the tax relief for higher rate taxpayers to eventually be hit, and with it, the tax relief on company pension contributions will be restricted as well.
2. I do not expect them to have the nerve to change the taxation of pension benefits. The tax free lump sum is unlikely to be touched. They've been pushing and pushing people to increase pension contributions. Auto-enrolment means that almost everyone is going to have a tax-free lump sum in their future. I don't think they dare touch that.
3. If I took the money that is going into pensions as a dividend, I'd be paying 19% corporation tax on it first and then 32.5% dividend tax on the remaining 81%. That's a net 45% or so tax. Even if there were no tax free lump sum, I do not expect to be paying 45% tax on those funds when I draw on the pension in retirement. So deferring the income until retirement is highly tax efficient, even if tax rates get somewhat worse.

Given all that, I've continued to top up my pension, even though I have a very large pension from permie days. I'll need to stop soon because of the lifetime limit. And we are making company contributions to my wife's pension every year (she's a director). We only do £6K a year for her because she is not a fee earner for the company and the amount needs to be somewhat justifiable. The rest, we do out of personal contributions even though that isn't quite as tax efficient.

I also make 5% company contributions for my employees, and encourage them to salary sacrifice at least 10%.

In short, I for one am a big believer in company pension contributions.

This is an excellent post. Thank you very much.

What process is involved, in addition to running the payroll by an accountant? Are there any additional filings required?

Really appreciate a response.

thank you very much.

[WordIsBond]

You need retained profits within your company year to pay pension else your company will be in a loss.

You cannot carry back a loss for pension contributions I have been told.

I saw your comments on another thread on this topic. As I said there, it depends on if it is a trading loss or not.

[Delboypass]

You need retained profits within your company year to pay pension else your company will be in a loss.

You cannot carry back a loss for pension contributions I have been told.

Although you can take Salary and dividends out of retained profit.

So if you arent trading and no profit, you cant pay a pension...but if you have retained profits from previous trading years, take dividend out of that.

[WordIsBond]

Again, I am not an accountant.

My understanding is that the full £120K would be an expense on the accounts of the year in which you made the payment.

If that left your company still in profit for the current year, that's the end of the story. You would have taken £120K off of your profit and £22.8K off your Corporation Tax.

If that resulted in a loss for this year, you could carry the entire loss back to the prior year. If your profit for the prior year was greater than the loss, then you would reduce the profit by the amount of the loss, and reclaim the CT that was paid on that amount. This is where the 20% as opposed to 19% might come in. If your carried-back loss is greater than your profit from last year, you would only carry back the amount equal to that profit. You would reclaim all of the CT you paid for that year. You would carry forward the remaining loss to next year.

You are only allowed to carry back losses one year, if your losses exceed last year's profits you carry the remainder forward. So in no circumstance would this affect 2015-2016. It could affect 2016-2017, but it depends on your company year. It is not the personal tax year that matters in terms of carry back/carry forward, it is company tax year.

Your accountant may not be an expert on pensions but he had better know about loss carryback or carry forward, and about pension contribution limits, and how it all relates to your company year. If he can't answer that stuff for you, it's time to find a new accountant.

[myself01]

Hi,

Thanks for your reply and your explanation.
I now understand your point about the £800 extra savings.

Yes I do have pension in my name. What it is is that about 10+ years ago, I was working for a company where I signed up for a pension scheme. When I left that job, the pension scheme continued in my name and it still does. I do get yearly report from it even though I haven't put any money in it for the last 10+ years (because of various reasons).

So I guess that qualifies me as having a personal pension.

I do have one more question on your reply .. and would really appreciate your comments again..

My company has been in operation since about 2.5 years. And I haven't taken put any money in pension for over 10+ years.
Let's say I put in £40k for 2017-2018, and another £80k (2014-2015 and 2015-2016) into my SIPP today.

Would the £80k be treated as an expenses in a single company operation year i.e. in year 2015-2016 (as my company didn't exist in 2014)?

I surely would call my accountant today to discuss this further .. though I know he is not a pensions expert..!!
Hence I am asking - just to understand it better myself.

[WordIsBond]

Ok, let me explain it this way.

If you make a pension contribution next year to carry back a loss to this current year of £80,000, you will save £15,200 in Corporation Tax (19%).

If you do it now, and are able to carry back a loss of £80,000 into a year where the tax rate was 20%, you will save £16,000.

So you MAY be able to save an additional £800 if you act quickly, but it partly depends on when your company year ends. And you should talk to your accountant about that.

It is my understanding that you can carry forward the £40K allowance for the last three years if a pension account was open during those last three years, whether the company was in business or not. The question, if I understand correctly, is whether or not you had a personal pension account during that time, which your original post sounded like you did.

Again, you should check with your accountant. I am not an accountant, and though I might know a thing or two I'm not an expert.

[myself01]

Very useful information on employer contribution to SIPP

Hi,

First of all, thanks for providing so much of practical information on making employer contribution to SIPP in a clear and concise way.
I am in the process of making employer contribution to my SIPP and I've been having questions in my mind, which you have answered.

I'd just like to double check one point you mentioned...

You mentioned:
if you make £80K a year profit and you can wipe out last year's profit by carrying back a loss due to your pension contributions, that tax savings is £800

Could you please confirm how is the tax saving £800?

I am thinking as follows:
- If a company makes an annual profit of £80k has not made any employer contribution to employee's SIPP, then the CT would be 19% (or may be 20% depending on the tax year) of the profit of £80k
- If the company now makes £40k contribution to employee's SIPP in the current tax year (2017-2018), the tax saving for the company would be = £80k profit - £40k expense = £40k profit. Therefore tax saving would be 19% of £40k - right?

One last question:
I understand that we can carry forward employers contribution for the previous 3 years. What if the company has only been in operation for 2 or even 1 year? Can we still carry forward employer's contribution for the last 3 years, even though the company did not exist 3 years ago?

I'd really appreciate your comments?

Thanks.

[WordIsBond]

You will want to check this with your accountant, and it may depend on your tax year. But I think if you
A. Have a lot of retained funds
B. Want to make large contributions
C. Act quickly
then it may be to your benefit.

Reasons:
1. It is definitely possible to carry over an allowance from the three previous years, if you had a personal pension account opened during those years.
2. You can contribute up to £40K / year.
3. That means if you have the funds available and made no contributions, and you act now, you can contribute £40K for 2017-2018 and £40K for each of the three preceding years (2014-2015, 2015-2016, 2016-2017). If you made contributions in any of those years, that reduces the amount you could contribute now on a pound for pound basis.
4. If you wait until after 6 April, you lose the allowance for 2014-2015.
5. You have to use the current year before you can use prior years. So to use the 2014-2015 allowance, you have to contribute this year's full allowance plus the 2014-2015 allowance before 6 April.
6. Any contributions reduce your company's taxable profit and thus save 19% corporation tax.
7. If you make multiple contributions for multiple years, it could put you in a loss position for the year.
8. If you have a loss position for the year, you can carry back the loss to the previous year and reclaim Corporation Tax paid in the previous year. Depending on your tax year, that might result in 20% savings rather than 19% savings, because of the change in CT rate.
9. If your loss exceeds your profit from the prior year, the remaining loss would be carried forward to next year.

If you want to use the 2014-2015 allowance, you need to act quickly. Forget the financial adviser, get the money pumped into the pension fund before the end of this tax year. Then, if you need financial advice as to where to invest it, get it, but the main thing is to get the funds into the pension pot before 6 April. You can transfer your pension somewhere else in May or June if you want to. You can't make 2014-2015 contributions then, it will be too late.

If you are going to create a loss for your current tax year, and are able to grab that 20% savings, again, depending on your tax year, this may require acting pretty quickly. If YourCo's tax year runs April-March, this would definitely be the case, you have to act now. 1% isn't a huge difference, but if you make £80K a year profit and you can wipe out last year's profit by carrying back a loss due to your pension contributions, that tax savings is £800. You could enjoy a nice weekend in Paris with your other half for that.

As to the philosophical questions:
1. I suspect HMG will place further restrictions on the tax benefit of making large pension contributions. I expect the annual limit to be reduced to £20K or even £10K in the future. I also expect the tax relief for higher rate taxpayers to eventually be hit, and with it, the tax relief on company pension contributions will be restricted as well.
2. I do not expect them to have the nerve to change the taxation of pension benefits. The tax free lump sum is unlikely to be touched. They've been pushing and pushing people to increase pension contributions. Auto-enrolment means that almost everyone is going to have a tax-free lump sum in their future. I don't think they dare touch that.
3. If I took the money that is going into pensions as a dividend, I'd be paying 19% corporation tax on it first and then 32.5% dividend tax on the remaining 81%. That's a net 45% or so tax. Even if there were no tax free lump sum, I do not expect to be paying 45% tax on those funds when I draw on the pension in retirement. So deferring the income until retirement is highly tax efficient, even if tax rates get somewhat worse.

Given all that, I've continued to top up my pension, even though I have a very large pension from permie days. I'll need to stop soon because of the lifetime limit. And we are making company contributions to my wife's pension every year (she's a director). We only do £6K a year for her because she is not a fee earner for the company and the amount needs to be somewhat justifiable. The rest, we do out of personal contributions even though that isn't quite as tax efficient.

I also make 5% company contributions for my employees, and encourage them to salary sacrifice at least 10%.

In short, I for one am a big believer in company pension contributions.

[adubya]

You can make an employer contribution into your personal pension fund as a company expense i.e. before CT.

The annual contribution limit is £40K but if you have an existing pension fund (as you have), then any unused contributions for the previous three years can also be used up.

So if you paid in say £10K each year in each of the last three years (includes employee and employer contribs) then you *could* contribute:

£40K this years annual allowance + 3 x ( £40K - £10K) == £130K in this tax year.

With such sums you do need to key an eye on pension contribution allowance taper (but it's unlikely to apply).

[northernladuk]

speaking to my accountant (NLUK disclaimer :-))

Nice but you forgot to do a search before you posted.

https://www.google.co.uk/search?sour...QU&safe=active

[gnarledcontractor]

Just wanted to find out what sort of strategies are being used for pension distributions from Ltd Company.
As I understand it from doing some research and speaking to my accountant (NLUK disclaimer :-)), its possible to claim relief
on Corporation Tax at a rate of 19% for paying in an amount up to £40,000 per year

So a brief illustration if one pays in £10,000 in one year (provided that the company does not show a trading loss as a result of that distribution) then corporation tax
is reduced for that year by £1,900.

I have a personal pension but its been sitting there for a while increasing year by year based on various fund investments. So I'd like to start to give it a bit more love.

My accountant has suggested I go and speak to a pension provider, but before I do this, I'm assuming this is already being done in the contracting community as a good way of offsetting Corporation Tax.

Three questions really..

1. What sort of strategies do others have in place for provision of pension from ltd?
2. If one hasn't done this is previous years, is it possible to carry an allowance over from previous years?
3. What does the community think of pensions, given previous governments treatment of them over the years?