Pension Carry Forward Advice

gee9fam

I would appreciate some advice regarding the following:

Small company with 2 directors (husband/wife both involved 100% in business). Company has accumulated a cash surplus (c£500k) due to paying small salary and company dividend.

Both directors have existing personal pensions that have received no contributions in the last 5 years and total earnings have been at basic rate tax for the last 4 years. Need to extract cash from the business in a tax efficient manner for the future. No immediate need for it.

My understanding is that I could use pension carry forward to extract up to £180k (£40k for current and 14/15, £50k for 13/14 and 12/13) for each director. This would then be an allowable business expense for the current tax year resulting in a saving of Corporation Tax (20% of £360k - £72k) that would generate a refund for the previous tax year with the balance against the current and future years until used in full.

As salaries have been low c£7.5k per year on average for the 4 years then I would only be able to make a personal contribution of c£30k per director. Would it be best to use these small amounts with the balance as a company contribution up to the limit of £180k?

I would be looking to put it into a SIPP for each director at this stage and then consider my options again when I have more time to get an IFA to carry out a full analysis of our position.

Priority is removing funds from the business. Is this correct and what other areas may be worth investigating?

bigadaj

Speak to your accountant and/ or an ifa.

Relying on forum answers for the sums quoted would be silly.

gee9fam

I appreciate your reply bigadaj

Have already had a discussion with my accountant where a number of options were discussed but was interested if others were facing a similar scenario in view recent tax changes and would sggest other areas that may be worth considering.

Linton

I couldnt get my head around all you were saying. However are you aware that you cannot carry foward the earnings limit for personal tax contributions? The directors earning £7.5K/year could only personally contribute £7.5K each year.

mania112

Yep you can go to £180k - this years allowance plus the previous 3 years.

This can only be a company contribution because it's above your Salary (£7.5k is the max you could do personally).

As you seem to be aware you both need to have had a pension for the past 4 years.

This reduces company accounts down to £140k. You'll need a float so you wouldn't want to wipe this all out, I don't suppose.

Another idea could be to invest the corporate money in a bond.

If you're asking this question because of the increase in Dividend tax - you could withdraw enough to fill your ISA allowance for this year and next.

jamesd

The annual allowances for the relevant years are:

2015/16: 40k
2014/15: 40k
2013/14: 50k
2012/13: 50k

That provides a total of £180k that the company and individuals can make in combined contributions now.

The gross value of the contributions direct from the individuals are limited to the earned income in this tax year which I'll assume is going to be 7.5k. They would receive basic rate income tax relief on these contributions even though their taxable income appears to be within the personal allowance. This assumes that the

So one possible optimal approach considering only the pension aspect would appear to be to make a net personal contribution of 6k that will be grossed up to 7.5k and make a company contribution of 172.5k.

Alternatively the business could do the whole £180k. That would be particularly useful if the directors do have other taxable income that means that in effect there would be pension tax relief on the payments, or if the directors do not have assets or income to pay in the net 6k.

gee9fam

thanks for the replies


mania112 - working capital requirements are minimal so not a problem extracting the cash. The corporate bond suggestion would that leave the money in the company? ISA allowance already taken for this year from personal assets, have I missed something here to extract money from the company?


jamesd - I was overlooking that the personal contribution would come from money already paid so would reduce the amount coming out of the company, no problem paying the £6k but would prefer to reduce cash so business is a little leaner if looking to sell in the future,


Many Thanks

mania112

Yeah the corporate bond leaves the money on the company books - not ideal if you're looking to devalue company assets.

In that case you could draw the cash out, pay the divi tax and then do a personal bond - it works in exactly the same way (assuming you're classified as micro entity)

Only other thing i've seen clients do is extract the cash to buy property - but that's another forum post.

No real solution if you don't have a NEED for the money. The question remains why you feel the need to draw cash out?

kidmugsy

There's a possible restriction in that the company pension contribution is meant to be a size suitable to the business and to the efforts of the two of you. Your accountant is presumably on top of that issue. If he's happy you might want too press ahead before the Budget on March 16th, in case of any forthcoming restrictions or reforms that might constrain you.

gee9fam

kidmugsy, thanks for the reply, as we are the only directors / shareholders with an equal shareholding and fully involved with no other employment I would very hope we would meet the criteria, if anyone has experienced a different response from HMRC please let me know

ScottyLP

Annual Allowance is £40k or your relevant UK earnings which ever is less.

As the salary is only £7.5k, the the annual allowance applicable is £7.5k which includes all contributions (Employees/Employers/Tax Relief)