Reply to: Pension Contributions - Closing Company

[WordIsBond]

I feel like sacking my accountant and employing you instead. Sad state of affairs when you get more knowledge and information from a forum than you do from an "accountant" you over £100 a month to.

It seems likely there are some things he knows that I don't, however.

But one more point on the above. My company year end was June so I've settled that CT bill but obviously will have to send final CT return once I decide how to close down my company. Using Fed's numbers, that 160k pension contribution which would would have otherwise been classed as revenue brings about a CT saving of 32k. So technically that 144k has cost an additional 32k in CT!

Well, obviously a pension contribution up to your profit this year saves CT and so is probably worth doing. Not so obviously but still true, if you didn't use your allowance in prior years, you can use it to make a pension contribution and carry back the loss for one year. So last year's profit could also be wiped out by pension contributions, allowing you to reclaim any CT paid on last year. And in most cases, I'd do that, too. Though perhaps it depends on how big your pension is, your age, etc. Because that pension will be taxable when you take it out.

Must admit I didn't completely get the point about dividend allowance/CG allowance as they obviously disappear when the company is no more. But on the ISA thing, you'd have 20k a year to contribute so that's over 7yrs before the total amount is invested vs. 160k being in an investment vehicle from day 1. If anyone is dealing with a company liquidation and has anything let's say over 100k surely it makes sense to split between making company pension contributions prior to sending final returns and then proceeding with an MVL for the residual

Ok, I'll get specific. You've got £144K after the MVL. You've got a £2K dividend allowance and a £12K CGT allowance, right?

So, the first thing you do is put £20K into an ISA, and invest it. Now, you've got £124K. You invest that, too. Let's say you put it all into funds. Let's put 30K into income-producing funds, and the rest in accumulation funds -- let's use trackers, for simplicity.

Your £30K income-producing funds produce, let's say, 6%. That gives you £1.8K in dividends -- covered by your dividend allowance. Maybe you do better, and they produce 8%. You've got £2.4K in dividends, and you have to pay div tax on £400, not a big deal.

Your remaining £94K is in accumulation trackers. At the end of the year, you sell £20K of that, selling those with the highest gains. If your gains are over £12K (unlikely, on £20K), you'll have some CGT. More likely, it won't be. But the £20K now goes inside your ISA, where you can buy the exact same funds, if you want.

If you didn't take the full £12K in gains (which is the most likely case), sell enough of your remaining funds to get to £12K in gains, and then reinvest them in a different but comparable tracker. Sell Vanguard, buy L&G, or whatever. The point is that if you have gains, you want to book them at the end of the tax year, up to £12K.

Now, you have £40K in your ISA, your remaining money is invested in funds outside the ISA, you've booked most of your gains (unless it was a really good year) without paying any tax, you've taken dividend income without paying any tax, and your ISA funds are growing. Do the same the next year -- some income producing (enough to use the div allowance), some growth producing (but managing your gains to avoid CGT and use the allowance), and keep funneling the max into your ISA every year.

[MrContractor85]

I think the rationale is that you are only making the pension payment to avoid tax ( don't ask me to explain further ).

Not sure if this has been discussed and hopefully not giving you another worry but one thing I thought of ( as a shamateur ) if you go down the MVL route is that you will still have a lot of funds in your Ltd at a point in time when HMRC could challenge things ( ie. potential IR35 investigation ). Via other routes your Ltd is bare when the accounts get submitted.

I always thought it was better to go with a "big" accountancy firm (they're not that big, just big with contractors) but if I was to do this again I'd probably go for a 1 man band who has a small shop on the high street! Few posters in this thread who have made more sense than they have in nearly 7 years

Contributing to a pension automatically protects those funds from any IR35 investigation even if they were to deem you inside, so a valid point

[rootsnall]

My accountant said similar. Said it would be "risky" to make a large pension contribution before closing down as I haven't made any contributions before. Didn't give me any rationale for it either.

I think the rationale is that you are only making the pension payment to avoid tax ( don't ask me to explain further ).

Not sure if this has been discussed and hopefully not giving you another worry but one thing I thought of ( as a shamateur ) if you go down the MVL route is that you will still have a lot of funds in your Ltd at a point in time when HMRC could challenge things ( ie. potential IR35 investigation ). Via other routes your Ltd is bare when the accounts get submitted.

[MrContractor85]

My accountant was adamant that making a large pension payment just before closing your Ltd would not be allowable as an expense, so you'd pay Corp Tax on it. ie. they'd challenge it in your final set of Ltd Co accounts. Not sure how true that is or they were just being cautious.

My accountant said similar. Said it would be "risky" to make a large pension contribution before closing down as I haven't made any contributions before. Didn't give me any rationale for it either.

[MrContractor85]

Yes, there are many factors. But let's not forget you can see exponential growth outside a pension pot, too.

As opposed to a pension contribution of 160K, if you MVL, you have 144K after tax, right? You then invest that, instead of 160K in a pension. So you get exponential growth on £144K, instead of £160K. You have an annual cap gains and dividend allowance, and you can move more of the £144K into an ISA every year, so most of your exponential growth is going to be untaxed. But your growth on your pension contribution will be taxed when you take the funds out of your pension.

The above doesn't make sense if you don't have the self-discipline to invest and not touch the funds. If you are just going to blow the money, it's better to lock it into a pension so you can't. So be honest with yourself, but if you are going to invest it either way, doing so in a pension is not necessarily substantively better than outside a pension, especially if you use your allowances to minimise tax ramifications.

I'm 100% for making pension contributions out of profit to save on both corporation tax and dividend tax. In almost every case, that's a slam dunk, unless you are bumping up against the lifetime limit.

But if the CT has already been paid and the funds are in retained profits, and you are looking to close down, MVL is usually a better move. An exception might be if you have maybe £50K or less. Then, it might make sense to make a large pension contribution to get below the £25K threshold.

I feel like sacking my accountant and employing you instead. Sad state of affairs when you get more knowledge and information from a forum than you do from an "accountant" you over £100 a month to. Anyway, I've made my bed

But one more point on the above. My company year end was June so I've settled that CT bill but obviously will have to send final CT return once I decide how to close down my company. Using Fed's numbers, that 160k pension contribution which would would have otherwise been classed as revenue brings about a CT saving of 32k. So technically that 144k has cost an additional 32k in CT!

Must admit I didn't completely get the point about dividend allowance/CG allowance as they obviously disappear when the company is no more. But on the ISA thing, you'd have 20k a year to contribute so that's over 7yrs before the total amount is invested vs. 160k being in an investment vehicle from day 1. If anyone is dealing with a company liquidation and has anything let's say over 100k surely it makes sense to split between making company pension contributions prior to sending final returns and then proceeding with an MVL for the residual

[rootsnall]

I don't see why not?

I'm assuming for this purpose the big pension contribution was for the primary fee earner? Ie I'd agree with your accountant's stance if a contractor wanted to put hefty sum into the pension of a spouse who does little for the company.

Also did your company ceased trading a while ago? Where that's the case, it might be that they're unable to carry back the loss made by a large, late, pension contribution to a period where there's sufficient profit to get full CT relief.

Ie there could be a few niche scenarios where I'd agree with your accountant, but for what I might consider a "normal" situation, it's fine as far as I'm concerned...and if anything we're at the slightly more cautious end of the spectrum on many things.

I'd finished trading a week or so before I suggested it, and yes it was for me the primary fee earner, and it wasn't sending me into a loss for the period in question. I did think about moaning but as it happens it wasn't that big a deal as I have extracted what is left in my Ltd without going into the higher rate tax band. I also needed some living expenses for the next few months. If what they suggested was true I suppose it could have given HMRC an excuse to query my final accounts and open a can of worms.

[Maslins]

My accountant was adamant that making a large pension payment just before closing your Ltd would not be allowable as an expense, so you'd pay Corp Tax on it. ie. they'd challenge it in your final set of Ltd Co accounts. Not sure how true that is or they were just being cautious.

I don't see why not?

I'm assuming for this purpose the big pension contribution was for the primary fee earner? Ie I'd agree with your accountant's stance if a contractor wanted to put hefty sum into the pension of a spouse who does little for the company.

Also did your company ceased trading a while ago? Where that's the case, it might be that they're unable to carry back the loss made by a large, late, pension contribution to a period where there's sufficient profit to get full CT relief.

Ie there could be a few niche scenarios where I'd agree with your accountant, but for what I might consider a "normal" situation, it's fine as far as I'm concerned...and if anything we're at the slightly more cautious end of the spectrum on many things.

[rootsnall]

My accountant was adamant that making a large pension payment just before closing your Ltd would not be allowable as an expense, so you'd pay Corp Tax on it. ie. they'd challenge it in your final set of Ltd Co accounts. Not sure how true that is or they were just being cautious.

[WordIsBond]

Also thinking about making a large pension contribution before going down the MVL route. Agree with the above but that doesn't really take into consideration the exponential growth you should see in that pension pot if you made a contribution of 160k. Generally speaking.

Yes, there are many factors. But let's not forget you can see exponential growth outside a pension pot, too.

As opposed to a pension contribution of 160K, if you MVL, you have 144K after tax, right? You then invest that, instead of 160K in a pension. So you get exponential growth on £144K, instead of £160K. You have an annual cap gains and dividend allowance, and you can move more of the £144K into an ISA every year, so most of your exponential growth is going to be untaxed. But your growth on your pension contribution will be taxed when you take the funds out of your pension.

The above doesn't make sense if you don't have the self-discipline to invest and not touch the funds. If you are just going to blow the money, it's better to lock it into a pension so you can't. So be honest with yourself, but if you are going to invest it either way, doing so in a pension is not necessarily substantively better than outside a pension, especially if you use your allowances to minimise tax ramifications.

I'm 100% for making pension contributions out of profit to save on both corporation tax and dividend tax. In almost every case, that's a slam dunk, unless you are bumping up against the lifetime limit.

But if the CT has already been paid and the funds are in retained profits, and you are looking to close down, MVL is usually a better move. An exception might be if you have maybe £50K or less. Then, it might make sense to make a large pension contribution to get below the £25K threshold.

[Hobosapien]

If you quickly open up a SIPP now you can pay £40K money in for the 2019-20 year.

That's an interesting point. May be worth opening a SIPP before the end of the current tax year just in case of wanting to carry forward unused annual allowances over the next 3 years.

The idea would be to open one and place the £160k in Vanguard (or similar) funds with minimal messing about over the years unless market catastrophe hits or Vanguard 'do an Enron' on us all. Trading will be limited to medium risk and lower risk funds/trackers, no individual shares.

I'm waiting for Vanguard to launch their own SIPP:

Get ready for the Vanguard Personal Pension (SIPP)

Though I've seen comparisons with other platforms and Vanguard is not necessarily cheapest, even for their own funds, when going over a certain size of investment pot. Will have to wait for the actual launch of their service before being sure of that.

This is incorrect. You only need to have to have been a member of a UK-registered pension scheme in each of the tax years from which you wish to carry forward. This doesn not have to be the new SIPP.

Nice one. I presume any UK pension scheme being paid into qualifies, such as private pensions or umbrella group pensions. All of which can be transferred to a SIPP but need to look for exit fees and fund transfer value costs.

Looks like there are a number of rules around it that need careful investigation before making any financial decisions:

Carry Forward Annual Allowance

[MrContractor85]

Pretty much the best case of taking the money out of the pension is you get 1/4 tax-free and the rest at 20%. That nets out to 15% taxation, as opposed to the 10% MVL. It's not just that the money is in your control as opposed to being locked up, it's also a lower tax burden with MVL.

That doesn't take into consideration the inheritance ramifications of having money in your pension when your contract with life expires. If you are going to have a large estate with inheritance tax kicking in, having the money in the pension could be a good thing. But failing that, MVL looks to me like a slam dunk choice in the situation.

Edit: and unlike Maslins, no one could accuse me of bias. They might accuse me of stupidity, arrogance, ugliness, and bad jokes, but no bias re: MVL, FWIW.

Also thinking about making a large pension contribution before going down the MVL route. Agree with the above but that doesn't really take into consideration the exponential growth you should see in that pension pot if you made a contribution of 160k. Generally speaking.

[Scoooby]

I transferred most of my SIPP from Hargreaves Lansdown to Interactive Investor recently due to the excessive fees HL now charge. It made sense if you have investments above a certain amount (think around £200-£250k).

I now pay £19.99pm and I'm thinking of opening an ISA and Junior ISAs with them as well for no extra charge on the monthly fee.

Probably looking to invest in a low cost tracker fund through them.

Also look around for cashback offers from II. They gave me £500 when I recently transferred from HL. Think they do these every few months or so rotating the offers around the various products they provide. Basically paid for the first 2 years fees!

[WordIsBond]

Company pension contributions will not be subject to corp. tax (notwithstanding the above comments), what is the situation with a MVL cash extraction ? Retained profits will already have had corp tax deducted, what happens to current company tax year income ?

True about company pension contributions, and Maslins made that point above, but only if you had sufficient profit in the current or previous year to cover the contribution.

MVL cash extraction is withdrawing capital, that's why it gets special treatment. Therefore, corp tax must be deducted first.

So yes, if you have profit that you want to and can shield from corp tax, pension contributions are superior to MVL from a tax perspective (though there's the risk the pension withdrawals will eventually be taxed at a higher rate).

[adubya]

Similar here..

I've been advised that you can pay into my previous year's pension (of which I haven't used the full 40k allocation)..

I'm considering adding funds (up the limit) in my current private pension (that I've had since I started contracting) for last year (18-19).
Also also putting up to the 40k limit into a new SIPP that I recently opened up (for this year 19-20)..

I think you're free to move money from pension to pension, so you could always move it to the SIPP..

That is, if what I've been advised is correct..

Cheers,

NP

Each individual pension pot doesn't have an annual limit, it's a personal limit. So nothing to stop you opening a new SIPP and contributing your current 2019/20 £40K allowance + any ununsed allowance from the last 3 years into that SIPP [assuming this won't take your ltd into the red].

[peel3000]

Similar here..

I've been advised that you can pay into my previous year's pension (of which I haven't used the full 40k allocation)..

I'm considering adding funds (up the limit) in my current private pension (that I've had since I started contracting) for last year (18-19).
Also also putting up to the 40k limit into a new SIPP that I recently opened up (for this year 19-20)..

I think you're free to move money from pension to pension, so you could always move it to the SIPP..

That is, if what I've been advised is correct..

Cheers,

NP