Reply to: Pensions and Corp tax

[ASB]

Pretty please to you have links or copies of the actually info supplied by HMRC?

[ducks for cover]

Search, one of the accountants posted it up recently. I do appreciate it can be hard to find in all the threads on this subject. I also understand that actually finding it on HMRC web site is bloody difficult!

Here's some for starters:-

http://forums.contractoruk.com/accou...rpose+of+trade

See bradley at 16:53 16/11/06.

Some guidance from HMRC (may not be current): http://www.hmrc.gov.uk/manuals/ctmanual/CTM08341.htm

See also the comments from freelance financials.

Try and find BIM446001 on HMRC

Theres loads of others but this might get you in the right direction.

[Olly]

I think some accountants are being too cautious, possibly because they are remembering out-of-date HMRC bulletins rather than relying on their most recent clarifications. The PCG advice (as I remember it) is that any amount paid out of fees you have personally generated for the company will not be excessive. (The "reasonable" limits would apply to a non-fee generating company secretary, however.)

HMRC have said (after earlier creating FUD by saying the opposite) that they will look at the total of pension and salary, not the split. Since I can't see them penalising a contractor for paying everything as salary, they shouldn't penalise anyone for paying everything as pension contributions. (On the other hand, either pension or salary paid to a non-fee generator could well be found to be excessive and therefore disallowed.)

Pretty please to you have links or copies of the actually info supplied by HMRC?

[IR35 Avoider]

We debated this a week or two back. After talking to my accountant ( and others ) the 'reasonable' amount you are referring to appears to be that the total of your salary + Co pension contributions must not be more than what would be considered an acceptable salary for your role. So if the going salary for your skillset is say 50K then you could pay 44K in Co pension contributions before the taxman could possibly question it. Does that make sense !?

I think some accountants are being too cautious, possibly because they are remembering out-of-date HMRC bulletins rather than relying on their most recent clarifications. The PCG advice (as I remember it) is that any amount paid out of fees you have personally generated for the company will not be excessive. (The "reasonable" limits would apply to a non-fee generating company secretary, however.)

HMRC have said (after earlier creating FUD by saying the opposite) that they will look at the total of pension and salary, not the split. Since I can't see them penalising a contractor for paying everything as salary, they shouldn't penalise anyone for paying everything as pension contributions. (On the other hand, either pension or salary paid to a non-fee generator could well be found to be excessive and therefore disallowed.)

[Olly]

I've always put =salary into pension (~6k this year), but only after I've filled up ISAs and warchest/retained profit first.

Why though? Because that's what you can afford or because of some (un)written rule?

[moorfield]

I've always put =salary into pension (~6k this year), but only after I've filled up ISAs and warchest/retained profit first.

[Olly]

Just like to pipe in to say I had this conversation with Quay (Clear Sky) a few days ago and their exact advice was

"Our general advice is that pension contributions should be kept in line with salary. If they are too much higher, or out of proportion with prior years, you run the risk of HMRC challenging them for being not within the purposes of trade and disallowing them"

I believe this to mean on basic rate salary they recommend a salary contribution by your limited of around 6.5K

Which HMRC links do you think I ought to point them as prefer the answer posted above i.e. 45K is more like it!

[rootsnall]

Not really TBH. Current guidance from the revenue suggest that anything paid out of gross profits would be for the puroses of trade (and that is the key point in whether they are allowable for CT purposes).

Some accountants do advice a more cautious approach.

Mine was more cautious, but has changed their stance with the changes to current guidance.

'for the purposes of trade' was the phrase I was looking for !

In other words you can reward an employee in salary + direct pension contributions up to what is regarded as a normal salary package for their skillset. Anything more than that is not 'for the purposes of trade' and therefore not allowable for CT purposes.

Rightly or wrongly I'm working on 50K as OK 'for the purposes of trade'.

I'll struggle to earn 50K at the moment anyway

[ASB]

So if the going salary for your skillset is say 50K then you could pay 44K in Co pension contributions before the taxman could possibly question it. Does that make sense !?

Not really TBH. Current guidance from the revenue suggest that anything paid out of gross profits would be for the puroses of trade (and that is the key point in whether they are allowable for CT purposes).

Some accountants do advice a more cautious approach.

[rootsnall]

Agreed, if it's you making the contributions. What if it's your company building a pot for its directors?

Like I said, as usual there are no simple answers

It can be direct from Ltd contibutions on your behalf. It is only if those direct contributions ( + salary ) are 'excessive' that I assume the IR could argue it is not normal business practice ( there is an IR phrase for this waffle ), and therefore you are doing it to dodge corporation tax.

[malvolio]

Agreed, if it's you making the contributions. What if it's your company building a pot for its directors?

Like I said, as usual there are no simple answers

[rootsnall]

I pay myself a salary £6,035 (personal allowance) and take a £30k dividend every year. How much can the company pay into a pension and therefore not pay corp tax on it. I've been told a 'reasonable' amount. What is reasonable?

Ta

We debated this a week or two back. After talking to my accountant ( and others ) the 'reasonable' amount you are referring to appears to be that the total of your salary + Co pension contributions must not be more than what would be considered an acceptable salary for your role. So if the going salary for your skillset is say 50K then you could pay 44K in Co pension contributions before the taxman could possibly question it. Does that make sense !?

[malvolio]

Sorry but on the face of it the OP is running a business and not wanting to pay any tax if at all possible without understanding the difference between company and personal money and the associated taxation rules.

And it's maybe not as simple as you all sem to believe.

The company can pay as much as it wants into a pension fund, and all of that money is taken before calculating CT, so is effectively tax free. Even so, if he takes little in the way of income and puts lots of profits into fund investments, the company might get reclassified as an investment vehicle and attract a whole load of extra taxes which can be rolled back up to six years.

The earlier limits on personal funds are largely scrapped these days, but there is a maximum size of your lifetime pension pot that you can own without attracting taxes on it of around £1.25m (from memory). Up to that point you pay tax on the income that fund generates, of course, but not on the fund itself. However there are (as always) various considerations to be aware of so as not to waste money which will vary depending on all sorts of things. There are also boundaries on the tax treatement of various funds, there are draw-down options and a few other interesting angles. Hence the need for an IFA who will understand it all properly.

So to put it simply, the OP's company can do what it wants and save CT as a result, provided that it doesn't put so much in to his personal account that he trips over his personal taxation limits. Those limits are probably high enough not to trouble the average contractor - but this is serious money and needs to be professionally managed.

HTH

[ctdctd]

Good reply RC

My understanding is that your salary + pension contributions can equal your contract income with no problems at all so long as you don't exceed your personal annual allowances.

[RichardCranium]

willwander, does this link help at all? - the type of pension makes a difference to the answer.

Or this link? Which has:

How much can I contribute?

I doubt this link applies to you as it gives advice on pension contributions for those who know they are caught by IR35.

[RichardCranium]

Sorry, but that demonstrates a basic lack of knowledge on several levels.

Maybe that's why the OP is asking questions.

I'm not even going to try and explain why.

Then why bother replying at all?

However, just as a starter for 10, pensions payments from the company aren't liable to CT.

The OP knows that but has been told there is a limit (which means someone is giving them some sort of advice) without understanding what they have been told so is seeking clarification from peers. That is perfectly reasonable.

Now ask your accountant (you do have one, I hope...) about how the company can manage its money and an IFA about the current rules on pension funds.

"Thanks for your question now go away and ask someone else." Was it really worth your replying at all?

HTH

Very, very unlikely I would have thought.


wilwander's post struck me as a perfectly reasonable question from someone who is seeking clarification.