Maximum company contribution to your private pension

diveleader

Hi all

Rather than the maximum total contribution set by the government I was looking for views on how much the HMRC will see as 'too great a contribution'

Myself and I my wife work for our own Ltd company.

We currently have a small (c£5k pa) salary made up with dividends.
The company also contribute £18.3k pa to each of our pension pots.
Currently, we do not make any additional contributions to the pensions and are (just) basic rate tax payers.

Now, the company has a fair amount of retained profit and cash earning very little in the bank.

Could I make additional contributions to the pensions (subject to the maximum figures allowed by HMRC) without the tax inspector getting funny about 'tax avoidance'?

When I first set the pensions up a couple of years ago, my accountant was OK with the 18k contributions but was wary about setting them higher.

Thanks in advance

JOHNGT

By definition, you and your wife have generated all of that retained profit.

A business is allowed to deduct business costs which are "wholly and exclusively" expenses of business. These expenses include the cost of employing people where you would look at their whole package - pay plus benefits including pension (but not dividends), to gauge whether their pay is excessive.

So, the question is does the business get £23.3K value from employing each of you? If it does, then fine, both your pay and pensions are deductible.

In fact you are both collectively worth more than £46.6K as you are building up excess profit despite paying yourselves this amount. In other words the business would make nothing without you and your wife, so by definition, the business can justify paying you everything it makes.

You should be able to pay everything you make between you into your pensions.

What may be the issue is the division of value added to the business between you and your wife. HMRC don't like businesses pretending that non-working spouses are working for the business. If one of you is doing minimal work for the business then the pay (including the pension) cannot be excessive in relation to the duties performed i.e. no more than if you had recruited an unrelated person off the street to do the same work.

Therefore, if one of you is substantially generating most of the profits then the pension contributions should be skewed towards that person. If the profit is generated 50%/50% then you can continue to reward both of you equally up to the whole profit of the business.

Note, the annual amount you can put in a pension falls from £255,000 to £50,000 for pension input periods falling into 2011/12.

diveleader

Thanks for the speedy response.

Yes, my wife is most definately employed - running the office functions 5 or 6 days a week.

I would estimate, that I would need to employ a person on circa 30k pa to perform the tasks that she does (an no, she's not sitting next to me!)

Therefore, there is some scope to increase pension contributions by at least 6k each PA with resulting benefits in reducing my Corporation tax.

Anyone else with 'light to shed'?