Limited Company Pension contributions

Marine_life

Can someone confirm the following for me?

I contract independently through a limited company in which my wife and I are the sole shareholders and directors.

I understand the company can contribute to a pension scheme on our behalf (and receive a deduction for the expense against corporation tax).

My simple question is whether there is any limit on the amount that can be contributed?

I am aware that there are limits on personal contributions but don't think there are any limits on company contributions.

Am I correct?

greatkingrat

The annual allowance (£40k) applies to the total amount contributed to your pension scheme, whether it comes directly from you, or via the company.

Marcon

You're correct to a very large extent - they don't have to be in relation to your salary from the business and you are simply subject to the normal overall limits. If you are both working in the business, then it's likely no eyebrows would be raised by your tax inspector at substantial contributions - but they need to be proportional and reasonable, so if one of you is 'notionally' a director rather than actually earning money for the business. that might catch an inspector's eye.

Sterlingtimes

Marine_life wrote: »

Can someone confirm the following for me?

I contract independently through a limited company in which my wife and I are the sole shareholders and directors.

I understand the company can contribute to a pension scheme on our behalf (and receive a deduction for the expense against corporation tax).

My simple question is whether there is any limit on the amount that can be contributed?

I am aware that there are limits on personal contributions but don't think there are any limits on company contributions.

Am I correct?

You are probably in a similar situation to me. I do not work a full week, but I just manage to avoid paying any Corporation Tax. My own salary and my wife's salary amount to a combined £16,800 a year. Then my company pays £40,000 a year to my own pension.

I took professional advice on whether it would be appropriate for the company to make contributions to my wife's pension. I was told that this was unproblematic and that it was for the directors to decide how they wish to remunerate themselves. However, I remain cautious on this point and would keep my wife's pension contributions (if they're required) proportionate to her salary.

P.S. There is also the possibility of using pension carry forward to increase contributions beyond £40,000.

Sibbers123

A fundamental principal for a company to get tax relief, the expense has to be incurred wholly and exclusively for the purpose of the trade.

If your company makes employer contributions to your wife, your wife must effectively 'earn' these contributions. Therefore, if both you and your wife do equal amounts of work there will be no issue. However, if your wife is not involved with exception of a little bit of admin here and there HMRC may argue that the pension contributions are not wholly and exclusively for the purpose of the trade and disallow them when calculating your corporation tax.

As mentioned above, if the wholly and exclusively test isn't an issue, then the basic maximum is £40,000 however, this may be more if you have been part of a pension scheme in the previous years or could be less if you are a high earner due to the tapering rules.

It is probably something you want to get your accountant involved in to have peace of mind.

Also, you'll need to notify your pension provider that they are employer contributions rather than personal contributions. If they are treated as personal contributions by the pension provider, HMRC have a very strong case to reclassify the payments as dividends or even salary subject to class 1 primary and secondary NIC!

Marine_life

Thanks for your responses.

....and it's highlighted the point that is confusing me!

Essentially I am in a personal situation where taper relief has kicked in and I think what people are saying is, that means the amount that can be paid in is restricted. But practically speaking what does that mean? i.e. say my personal limit is fully tapered i.e. I have a personal allowance of only £10,000 - how does that impact the amount the company can pay in (and get tax relief for)?

As regards the wholly and exclusively, my wife does all the admin so my intention was to reflect that in the amount we contribute for her.

Thanks again for the helpful replies.

kidmugsy

Marine_life wrote: »

i.e. say my personal limit is fully tapered i.e. I have a personal allowance of only £10,000 - how does that impact the amount the company can pay in (and get tax relief for)?

As far as I know the £10k limit applies to your company too. Similarly if you had already drawn down some non-TFLS pension, the £4k limit would apply to the company.

But the company is not restricted to your age of 75 being the limit on tax-efficient contributions.

If I'm wrong, fellow readers, please say so.

atush

If your taper is kicking in, have you paid too much in salary and not enough in dividends?

Do you have an accountant for your company?

trailingspouse

We have a similar set up in that we pay ourselves via a small salary + dividends. Our company is contributing to both our pensions - on track to hit the max £40,000 each this tax year.


I would suggest that you speak to either your accountant or an IFA, particularly regarding contribution to your wife's pension.


OH works on the technical side of things - but I do all the rest. It's not just 'a little bit of admin' - I do the VAT returns, invoicing, chasing payments, interviewing and hiring sub-contractors, payroll, all the bookkeeping, flying the flag at conferences, writing proposals, preparing contracts. The list goes on. I don't 'earn money for the business' - but if I wasn't there to do what I do, I like to think I would be missed!!


If your wife contributes to your business, don't undervalue her contribution.

Sibbers123

Paying yourself a low salary and high dividends doesn’t avoid the tapering provisions for the annual allowance.

The annual allowance is tapered if your threshold income (total income including dividends less personal pension contributions) exceeds £110,000 and your adjusted net income (total income including dividends plus employer contributions) exceeds £150,000 - quite complicated.

From experience, use an IFA to choose the pension you use, and a tax adviser to ensure you don’t fall in to any tax traps.

Even though your annual allowance is tapered this year, the tapering provisions only came in in 2016/17 meaning you’ll probably have annual allowances brought forward that could be taken advantage of from 2015/16.

Sibbers123

As for meeting the wholly and exclusively test, HMRC won a recent case (McAdam vs. HMRC) where a plumber paid his wife a salary of £90 a week. HMRC won and the salary was disallowed.

It is common for individuals to pay spouses (salary and pension cont’) and just hope not to get a brown envelope on their door mat.