Limited company director - pensions

Gary1984

I'm almost certain that it's ok for pension contributions to exceed annual profits.  As mentioned, they could be paid out of retained  earnings. But surely a lot of startups won't turn a profit for a number of years? Not paying pension contributions until a profit is made isn't really viable, and no doubt illegal under auto-enrolment?

ffacoffipawb

Gary1984 said:

I'm almost certain that it's ok for pension contributions to exceed annual profits.  As mentioned, they could be paid out of retained  earnings. But surely a lot of startups won't turn a profit for a number of years? Not paying pension contributions until a profit is made isn't really viable, and no doubt illegal under auto-enrolment?

Paying pension contributions out of retained earnings misses out on corporation tax relief as well. Would have been better being paid when they were earned so that they could have been relieved against said tax.

Gary1984

Oh yes of course. I just meant it was allowed, not optimal. However, I think losses can be carried forward though to offset future corporation tax? Obviously depends on turning a profit in the future though. 

KCartwright

ffacoffipawb said:

Gary1984 said:

I'm almost certain that it's ok for pension contributions to exceed annual profits.  As mentioned, they could be paid out of retained  earnings. But surely a lot of startups won't turn a profit for a number of years? Not paying pension contributions until a profit is made isn't really viable, and no doubt illegal under auto-enrolment?

Paying pension contributions out of retained earnings misses out on corporation tax relief as well. Would have been better being paid when they were earned so that they could have been relieved against said tax.

My accountant has advised that it can be adjusted against any unpaid cooporation tax. 

Imagine a company with year ending Dec 2019. Corp tax - 20K for Jan - Dec 2019, however company returns not filed yet.

Company brings forward the year end to Mar 2020. Pension contribution of 100K in Mar 2020. Corp tax from Jan 2020-Mar 2020 is 7K (without taking pension contribution into consideration). Therefore when company files returns, the total Corp Tax (from Jan 2019 to Mar 2020) to be paid is:

20000 (For 2019) + (7000 (For 2020) - 19000 (Pension impact)) = £8000.

Is that right?

BobWelham

As far as I know, an interesting difference between direct company pension contributions and personal pension contributions made from relevant income is that above the age of 75, assuming continued employment by the company, the former still offers relief of corporation tax but the latter does not offer relief of income tax (as it does for an employee aged below 75).
This could be very useful in later life for IHT planning, though it is probably not of interest to the OP who, expressing interest in LISAs, I assume to be aged under 40.

More relevant for employees up to State Pension Age are the advantages of formal salary sacrifice pension contributions over simple post hoc personal contributions.
Under the former, but not the latter, and in addition to the usual personal income tax relief (20% or 40%) and company corporation tax relief (19%), HMRC gives very valuable NI contribution relief to both the employer (13.8%) and the employee (12%). It seems to me that, if a personal contribution is to be made, it is far better to do it under the salary sacrifice scheme than not.

cjking

ffacoffipawb said:

Gary1984 said:

I'm almost certain that it's ok for pension contributions to exceed annual profits.  As mentioned, they could be paid out of retained  earnings. But surely a lot of startups won't turn a profit for a number of years? Not paying pension contributions until a profit is made isn't really viable, and no doubt illegal under auto-enrolment?

Paying pension contributions out of retained earnings misses out on corporation tax relief as well. Would have been better being paid when they were earned so that they could have been relieved against said tax.

Not necessarily. If your company makes a loss in the current year, possibly because of a large pension contribution, that loss can be carried back one year and used to reduce profits there, so you get back your corporation tax. If even after doing that you still have a loss, it can be carried forward to future years to reduce profits (and corporation tax) then. 

In short: current year losses can be set against profits of one previous year and all future years.