Reply to: How much do you pay into a pension?

[xoggoth]

As Dim says, annuity rates (about 6% on £100k at best currently and that's without any guarantees, payback or index linking) are not good and likely to get worse as old farts accumulate. On the other hand, a company payment is free of NI and not just tax like a personal ISA would be. Probably the sort of calc Excel is good for.

[IR35 Avoider]

You might want to look at a thing called "immediate vesting" which may be appropriate. Here you make a pension contribution, get the tax relief, take the 25% lump sum, convert the balance into an annuity. Depending on your individual tax position this can sometimes be useful.

Contribute 2808, upped to 3600 through tax relief, 900 tax free cash, so actual cost 1808. Leaves 2700 for an annuity, @ 6.5% at age 50 gives 125 p.a.

Earn 100K, use 5K for company expenses, profit and corporation tax on profit, 5K for salary, 90K into immediate vesting pension, 22.5K immediate tax-free income, 67.5K producing an income for life which is taxed at the basic rate.

The only downside is that it means you're still contracting at an age you're allowed to draw your pension. (55 for me.)

You can see why this might upset a tax inspector, even though the rules allow it, so join the PCG so they can argue on your behalf, if necessary.

(Actually I'm not certain if an immediate vesting pension can be contributed to be an employer, but I don't see why not, it's just a slightly speeded up version of what you can do anyway by contributing to a pension then taking benefits.)

Edit: After doing some googling, can't find anything that says an employer contribution can be made. Never mind, just set up a new pension each year, contribute to it through-out the year, convert it into tax-free lump-sum plus income the following year.

[ASB]

I'm 48 now so will be able to get some at 50....


Thanks for your help

You might want to look at a thing called "immediate vesting" which may be appropriate. Here you make a pension contribution, get the tax relief, take the 25% lump sum, convert the balance into an annuity. Depending on your individual tax position this can sometimes be useful.

Contribute 2808, upped to 3600 through tax relief, 900 tax free cash, so actual cost 1808. Leaves 2700 for an annuity, @ 6.5% at age 50 gives 125 p.a.

[IR35 Avoider]

I wouldn't say that paying contributions out of fees "cannot possibly" be considered excessive. I would have thought that, for the reasons you cite, it would be unlikely, but I can certainly envisage a scenario whereby an over-enthusiastic Inspector would seek to disallow an element of your contributions on the basis that the company "should make a profit", albeit I acknowledge and personally agree with what you say regarding the parallels with IR35.

I don't think there is any definitive answer on this one as it is too soon for there to be any caselaw but I would probably personally be slightly more cautious than you and draw out as much as you can as a tax-free dividend (if anything, depending upon your other income obviously).

Whilst HMRC have issued guidance on this matter, from memory again it is not definitive.

PUMA

I agree with what you say, there is plenty of room for them to start an argument. I'm just farily confident of winning, especially with help from PCG specialists.

I saw in one of their on-line manuals that individual inspectors are not supposed to challenge contributions, they are supposed to refer the issue to a central unit. I take this to mean that they realise the area is a minefield. It can't have been the intention of the legislation to make it much harder for owner-directors to build up a pension than anyone else, nevertheless an aggressive interpretation of "wholly and exclusively" would have that effect. If an arms-length employer (e.g. an umbrella company) paid contributions of the same size there would be virtually no risk of it being seen as uncommercial. There would be no question in the inspectors mind as to whether the payment was governed more by the interests of the employer or those of the employee.

As for the company making a profit, I declare all my fees as IR35-caught, so my pension contributions in no way reduce the profit. If I reduced them it would simply mean paying an increased (or deemed) salary. (When I said the rest above 5K goes to pension, I mean the rest up to 95% of fee income, I was oversimplifying slightly.) This looks to me like a cast-iron defence against any objection to the size of the remuneration, so I think the argument would be about whether there was a non-trade purpose for the split. The problem is, it's blindingly obvious there is a non-trade purpose, in the form of tax savings, but that applies to every employer contribution, so the test can't be as simple as that. I think the test has to be whether the company has incurred expenditure it needn't have to achieve it's purposes. Of course in an owner managed company, any expenditure on salary or pensions falls into that category. Since they stand to get all profits anyway, reducing profit by giving themselves any salary or pension at all could arguably be uncommercial spending. That is a ridiculous but rational interpretation of the rules. This is why I say the whole area is a minefield.

What would happen if the company had no money to pay a larger than expected Corporation tax bill? I don't think the director could be faulted for failing to anticipate the situation, and in his capacity as employee it would be entirely reasonable to offer his future services to clients through a different service company, one that could pay him more because it wasn't saddled with a large debt.

[ratewhore]

...I can certainly envisage a scenario whereby an over-enthusiastic Inspector would seek to disallow an element of your contributions on the basis that the company "should make a profit"...

Interesting that. I had a previous discussion with my accountant about a business class flight and how an over-enthusiastic Inspector could take the view that the increase in spend reduces profit, consequently reducing tax take and therefore disallow it...

[THEPUMA]

I've answered this question a few times in this forum. I'll assume the over 200K limit is not relevant.

1. You personally are limited to 100% of salary.
2. Your company can contribute as much as it likes.
3. Lots of accountants are confused, because after the new rules came in HMRC tried to scare everyone off paying big contributions by threatening to disallow them as a deduction for Corporation tax. They have since backed down. The bottom line now is that if your company is paying contributions for yourself out of fees you personally generated for your company, that cannot possibly be considered excessive remuneration. (What could be disallowed is if for example you paid into wifes pension, and the total of her salary and pension contributions were more than the value of her work to the company.)

If you search out previous threads on this subject you will find various people have posted links that confirm what I say.

I pay 5K salary and the rest of my fees (up to 95% turnover) as company contributions.

The whole point of IR35 was that HMRC wanted us to turn all our employment income into remuneration (pension and salary both count as remuneration in the IR35 calculation) so it would be incredibly hypocritical if they suddenly said that level of remuneration was excessive.

If HMRC do ever ask why I contribute a lot to a pension, I would be very careful with the wording of my answer, so that they don't deduce a "non-trade purpose" for the level of contributions. (If you say "because I'll eventually get my money with less tax deducted" that could be a non-trade purpose. If you say "because it makes no fiancial difference to the company how remuneration is split, and this split maximise employee happiness within a given total remuneration" than I would say that is a legitimate "trade purpose." Actually I would get advice from PCG tax specialists about what to say. I really don't expect to be asked though, I think what I'm doing is now acceptable to HMRC.)

I wouldn't say that paying contributions out of fees "cannot possibly" be considered excessive. I would have thought that, for the reasons you cite, it would be unlikely, but I can certainly envisage a scenario whereby an over-enthusiastic Inspector would seek to disallow an element of your contributions on the basis that the company "should make a profit", albeit I acknowledge and personally agree with what you say regarding the parallels with IR35.

I don't think there is any definitive answer on this one as it is too soon for there to be any caselaw but I would probably personally be slightly more cautious than you and draw out as much as you can as a tax-free dividend (if anything, depending upon your other income obviously).

Whilst HMRC have issued guidance on this matter, from memory again it is not definitive.

PUMA

[ASB]

I pay 5K salary and the rest of my fees (up to 95% turnover) as company contributions.

Could you not improve your "safety" in terms of the level of contributions by:-

- Paying yourself a "nominal" salary of 95%.
- doing a salary sacrifice to then change the majorirty of that into pension contributions

[Hiram King Of Tyre]

I'm 48 now so will be able to get some at 50....


Thanks for your help

[IR35 Avoider]

This thread has a fuller discusion.

http://forums.contractoruk.com/accou...hlight=pension

In it, somebody posted this link, which might help.

http://www.moneymarketing.co.uk/cgi-...id=136528&d=11

I have non-pension savings, paid for house and a working wife to tide me over. (12 years until I can get at the pension money, even without wife I could probably pay all my household expenses until then from savings, though I would have to run them down to almost zero.)

[Hiram King Of Tyre]

Thanks avoider. That's exactly my interpretation. Do you have anything to substatiate point 3? That's the bit my accountant has difficulty with. (I will have a look too).

I'd like to know how you manage on £5k a year though? I assume you have other income. Incidently, by doing what you do, I assume that IR35 isn't much of an issue?

[IR35 Avoider]

My accountant suggests that company contributions should not exceed salary. This is a bit of a limitation for me. They suggest that any more may be subject to CT if it is deemed to not be "wholly and exclusively for the business.

I've answered this question a few times in this forum. I'll assume the over 200K limit is not relevant.

1. You personally are limited to 100% of salary.
2. Your company can contribute as much as it likes.
3. Lots of accountants are confused, because after the new rules came in HMRC tried to scare everyone off paying big contributions by threatening to disallow them as a deduction for Corporation tax. They have since backed down. The bottom line now is that if your company is paying contributions for yourself out of fees you personally generated for your company, that cannot possibly be considered excessive remuneration. (What could be disallowed is if for example you paid into wifes pension, and the total of her salary and pension contributions were more than the value of her work to the company.)

If you search out previous threads on this subject you will find various people have posted links that confirm what I say.

I pay 5K salary and the rest of my fees (up to 95% turnover) as company contributions.

The whole point of IR35 was that HMRC wanted us to turn all our employment income into remuneration (pension and salary both count as remuneration in the IR35 calculation) so it would be incredibly hypocritical if they suddenly said that level of remuneration was excessive.

If HMRC do ever ask why I contribute a lot to a pension, I would be very careful with the wording of my answer, so that they don't deduce a "non-trade purpose" for the level of contributions. (If you say "because I'll eventually get my money with less tax deducted" that could be a non-trade purpose. If you say "because it makes no fiancial difference to the company how remuneration is split, and this split maximise employee happiness within a given total remuneration" than I would say that is a legitimate "trade purpose." Actually I would get advice from PCG tax specialists about what to say. I really don't expect to be asked though, I think what I'm doing is now acceptable to HMRC.)

[Hiram King Of Tyre]

I think you may still have to buy an annuity at 70 but for me that's not an issue. I have 28 years in a final salary scheme that I will rely on post 70. I am running a SIPP really to suppliment that until I too old to need any more...

The other point worthy of note is that (I believe) a pension is willable outside of IHT

[moorfield]

I don't think you have to take the annuity now until you reach 75, and I am planning to have all my money out of my pension by then anyway, starting with the 25% tax free at 55 which I can take whether I'm working or not.

[DimPrawn]

Moorfield,

I think the operative word there is "You". I therefore assume that the HMRC document is referring to personal contributions. It says flip all about company contributions.

Dimprawn,

I'm not really considering annuities. I have a SIPP. This allows me just to put the pension into drawdown......the first part of which allows me to take 25% tax free.

Can you draw 100% of the SIPP pot at retirement and avoid buying an annuity or are there rules that say, by 70 yrs old you must buy an annuity?

[Hiram King Of Tyre]

Moorfield,

I think the operative word there is "You". I therefore assume that the HMRC document is referring to personal contributions. It says feck all about company contributions.

Dimprawn,

I'm not really considering annuities. I have a SIPP. This allows me just to put the pension into drawdown......the first part of which allows me to take 25% tax free.