Lump sum pension payment from limited company

ellectrastar

Hi,


I'm a director of a limited company.



I have read that the company can make a payment straight into my personal pension and that this is considered an allowable business expense. The limit is 40k a year; I would be looking at a one-off contribution for two directors at 5k each.



So, can I transfer the money to my account and log the payment as per other normal outgoing amounts? And then when it comes to do the tax return next year it is just deducted from the profit the same as any other expense?


I understand that any payment made has to be "wholly and exclusively" for the purpose of the business. I've read a bit on the HMRC site but am I right in thinking that it seems pension payments are generally covered under this requirement?


Anyone has any experience would be glad to hear about it.


Thanks.

dunstonh

The limit is 40k a year;

It is one of the limits but may not be the applicable limit to your scenario. There are potentially other limits as well. Some may be soft limits based on your situation.

So, can I transfer the money to my account and log the payment as per other normal outgoing amounts?

Theoretically but you are over complicating it and risking it being classed incorrectly as the audit trail shows a payment from the business to the personal accounts. The pension company may treat a payment from personal accounts as a net employee contribution as they would expect an employer contribution to come via the employer bank account.

So, yes it is possible but it is unnecessary to do it that way, it creates extra work and confuses the audit trail and opens up the chance of a mistake. So, best not to.

I understand that any payment made has to be "wholly and exclusively" for the purpose of the business. I've read a bit on the HMRC site but am I right in thinking that it seems pension payments are generally covered under this requirement?

Shareholding directors rarely get looked at in respect of pension contributions. Especially the key worker. If the other director is spouse/partner has another job and/or and is on the books in a minor role, you do run risks if you push the contribution amount too high. There is no hard limit in that respect as it's up to HMRC to decide what is acceptable. Although its unlikely a £5,000 each contribution would even register on their radar.

if there are different share classes for the directors, they may take an interest but again, at £5k they are not likely to look at it.

There are lots of little quirks and sometimes its a case of try and see what HMRC say but based on the amounts involved here, as long as both are shareholding directors on the same share classes then the amount is highly unlikely to be an issue.

And then when it comes to do the tax return next year it is just deducted from the profit the same as any other expense?

The accountant will include it as a business expense.

2stixoftwix

I am a director of my own Ltd company. Just me and hubby - no other employees.

I did this last year, however, I paid it directly as a lump sum (£20k) from the company bank account into my pension fund.
This meant I didn't pay corp tax - so a saving of 19% and of course the dividend saving.
My accountant said no problem with the "wholly and exclusively" section

HTH

ellectrastar

Thanks both.



I probably didn't make it too clear. I am planning on making the payment from the company account direct into each pension (not into any other account of mine as that probably read!) As you say dunstonh, I don't want to pay it to me, and then pay it to my pension, as then there is more paperwork and declarations, and relating to SA, is that right?



We are both directors and employees, same shareholding, same pay, so sounds pretty much the same as you 2stix. Not meaning to sound naive, totally understand this saves me paying corporation tax on the profit, but what do you mean by the "dividend saving". That by putting money in the pension as opposed to taking it as a dividend you save having to pay the dividend tax on it?


When you paid it 2stix did you just pay straight into the pension accounts and that was it? We keep a cash book with all our ins and outs recorded so would then enter it in the outgoings and give this all to the accountant when it's time to put together the corporate tax return?



As a side note I would ask our accountant directly about this, but he is on hiatus for another month or so and I don't have much faith in his reserves!

Marcon

Pay straight from the company's bank account to the individual personal pension providers, making sure they know it is a company contribution - they don't always check the cheque, so to speak! It's then treated as an expense in the same way as, say, your salary.

ellectrastar

Marcon wrote: »

Pay straight from the company's bank account to the individual personal pension providers, making sure they know it is a company contribution - they don't always check the cheque, so to speak! It's then treated as an expense in the same way as, say, your salary.

Does it make a difference to the pension people as to where the money comes from then?

Marcon

ellectrastar wrote: »

Does it make a difference to the pension people as to where the money comes from then?

Yes - different tax treatments. Company contributions don't qualify (but get corporation tax relief and the employee hasn't paid tax in the first place), contributions from individuals means the pension provider can claim basic rate tax on their behalf and add to the pension pot.

greenglide

Yes, it does as they need to know not to claim the tax relief from HMRC on the employer contributions.

ellectrastar

Thanks all!

Weave

We do exactly what you are proposing every year. We use Hargreaves Lansdown for our SIPP's and they have a form you can complete and send to them prior to transferring the money across to them. You may be able to notify them by secure message now if you happen to use HL.

They then know not to try and claim back any income tax on the contribution as its come in gross from the employer.