Limited company director pension question

bakescakes

Am PAYE employee with pension via employer. Also run a LTD company with my partner and want to make contributions to our private pensions from the company directly.
Do we have to
1. Take the money as dividend then pay into pension and declare on tax return to reclaim the tax benefit
2. Set up a company pension scheme and pay into a new scheme
3. Provided we don’t exceed the annual or total lifetime limit, just pay directly into our personal pensions from the company ( and gain the benefit because this amount isn’t liable for corporation tax)?

We are not employed by the company and take minimal dividends because we are both employed elsewhere- the company funds are for NED and consultancy work allowed for by our employers.

This is the advice from my company accountant

bakescakes

employee contributions for the pension are not a company expense but the expense of the individual director.

Therefore either they have to be treated as salary or dividends. I imagine in this case the payment should be regarded by the company as effectively a dividend payment and should be noted in the records such to ensure that there is no problem with HMRC as to the treatment, i.e. is it a dividend. (Effectively what is happening is the company's giving you funds which were then investing in the company pension scheme).

The dividends are subject to tax on you personally.

Prism

Normally you would make employer contributions directly into the pensions from the company. As you say this would reduce corp tax. What I don't know is that because you are not taking a salary, whether this changes anything

bowlhead99

bakescakes wrote: »

Do we have to
1. Take the money as dividend then pay into pension and declare on tax return to reclaim the tax benefit
2. Set up a company pension scheme and pay into a new scheme
3. Provided we don’t exceed the annual or total lifetime limit, just pay directly into our personal pensions from the company ( and gain the benefit because this amount isn’t liable for corporation tax)?

1)
You can use money from whatever sources you like to pay into a pension - existing savings from a bank account, the new money that arrives in the bank account from your main PAYE job, the money that arrives from dividends from your LTD, interest you earned on your savings or investments, gifts received, etc. At the time you pay money into a pension it doesn't really matter where it came from.

However, the amount you can pay into a pension in a year is limited to your earnings, which doesn't include divs from your LTD or from other savings or investments or interest or gifts etc.

So, for example, if you only earn £30k at your main job you can't take a £10k dividend from your LTD and be allowed to contribute £40k total. Whereas if you earn £50k at your main job it is no problem doing £40k gross contributions over the course of the year between you and your employer - even if you already spent most of your salary on living costs and so needed to use income from dividends to help you with the cashflow.

2) The company could pay into a scheme for the employees that work for it. Or, as in your (3), it could pay into the employees' personal schemes. But you currently don't work for it, so presumably you'd need to start working for it, so that it has some business purpose to make contributions for you.

If you are only talking about you personally (not the LTD company) paying into a new pension arrangement for you, you don't need the company to set it up, you can open a personal pension with any DIY provider.

3) If you don't work for the company, it doesn't really have a reason to put its money into a pension for you

For 2 and 3, the business can only get corporation tax relief on 'company pension contributions' it makes if they are genuine allowable business expenses under normal corporation tax rules - the pension contributions should be ‘wholly and exclusively’ for the purposes of the business. A contribution would not be allowable if there is an identifiable non-business purpose for the employer’s decision to make the pension contribution, or the size of the contribution was ridiculously out of whack with its purpose.

So, the company couldn't just say, "hmm, I heard that my owners' pension pots are a little light at the moment, so I would like to stuff some money into the owners' pensions, instead of paying them dividends out of my taxed profits". There is no genuine business purpose of the company giving its money away in that manner, other than artificially lowering it's profits. Giving money away in exchange for nothing, doesn't help the business at all.

What the company could do is employ you - for the genuine business purpose of having you work part time in the business and generate revenue for the business by providing consulting services to third parties or whatever - and as part of your compensation for that employment it could agree a small salary (so as not to create a big employees or employers national insurance bill), and a chunky pension contribution.

Then its costs of employing you (including salary, NI and company pension contribution) for that genuine business purpose would be deductible from its income to arrive at a fair profit. Which would be a lower taxable profit than if it had not employed you, so it saves corporation tax. And you get a bit more salary than you would have had if you only had one employer paying your salary, but you can always make personal pension contributions too, and 'use up' that extra salary subject to annual and lifetime limits.

So then you'd end up with salary from two sources (existing employer plus LTD), and pension from your PAYE job, and company pension from your LTD, and perhaps some personal pension from yourself (either paid into the scheme that your PAYE job pays into or the scheme that the LTD pays into, whichever you prefer).

This is the advice from my company accountant

I'm not clear what 'advice' he has given you in relation to your desire to get a contribution into your pension in the most efficient manner. You are asking *us* your questions about 1,2,3. What did he say when you can asked him for the advice on how to efficiently contribute to a pension?

Brynsam

bakescakes wrote: »

This is the advice from my company accountant

Get a new accountant. Most efficient way to achieve what you say you want is to become PAYE employees of your limited company on minimal salaries and then the company can make pension contributions on your behalf with no tax/NI liability for you and CT relief for the company. Pension contributions can be more than your salary from the limited company and HMRC will normally be fine with this, provided they aren't ridiculously high.

drumtochty

[FONT=&quot]There is no reason at all to pay the directors a salary.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]As the directors are working for a different company and are receiving a liveable salary from their full time employment.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]If you are both directors of the limited company and you pay gross pension contributions from your limited company into your own private pensions, HMRC are within their right to ask why both pension payments from the limited company are not in the same ratio as the share ownership that you have. [/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]For those who have said you cannot pay the amounts gross to pensions from the Ltd company or you must pay yourselves a wages from the pension first please advise the specific HMRC regulation that demands this.[/FONT]

00ec25

bakescakes wrote: »

employee contributions for the pension are not a company expense but the expense of the individual director.

utter rubbish in the context of the OP as director, as said, time for a new accountant who bothers to understand their client's activity

00ec25

a director is an officer of the company
there is no requirement whatsoever that they be paid PAYE in order to be "working" for the company

their involvement in the company is a fact of their office, and as such their remuneration could be 100% pension contribution, no salary, no dividend

Terron

bakescakes wrote: »

We are not employed by the company and take minimal dividends because we are both employed elsewhere- the company funds are for NED and consultancy work allowed for by our employers.

Directors of a company are employed by the company.

cjking

Directors of a company are employed by the company.

I disagree, even though PAYE is used to collect tax on any salaries. It's some sort of legal distinction, an employee is a servant of the company, a director is not.

I think this is the reason why minimum wage does not apply to directors.

(Edit: Actually a director can have a contract of employment, in which case minimum wage applies, but they don't have to.)

cjking

In general if you are a company director of a company you own, the best approach is to pay employer contributions into a pension scheme.

You don't have to set up a special scheme, most SIPPs will accept employer contributions. I opened my account with Youinvest, paid a couple of years contributions myself, then over the next ten years only paid employer contributions.

Apart from the Lifetime allowance and the Annual Allowance, the only other thing to watch out for is that each individual's total remuneration from the company is not excessive. (Employer pension contributions are part of remuneration, obviously so is salary.) If you pay someone more than they are worth the excess could be disallowed as a company expense, i.e. no corporation tax relief. Any amount that does not exceed what they personally bring in doing consultancy work should be fine, in that regard.

Note that the rule that pension contributions cannot be more than 100% of salary does not apply to employer contributions, the allowed amount has no relation to salary.

Edit: sorry, I see Bowlhead said a lot of this already.