Director pension

Barry_Bear

I think a director of their own small limited company the company can pay in up to £40,000 pa (if there are enough profits) directly into the directors SIPP.  Is that right?

Does there have to be a directors personal pension scheme or something else specially set up to do this? Or does the company just make the payment into the SIPP and the accountants record it when doing the year end audit?

Is the amount limited to the amount of earned non dividend income, or is that only when the director pays the contribution themselves?

dunstonh

I think a director of their own small limited company the company can pay in up to £40,000 pa (if there are enough profits) directly into the directors SIPP.  Is that right?

Potentially more if there is carry forward allowances available in addition to the current year's £40k.

Does there have to be a directors personal pension scheme or something else specially set up to do this?

Any personal pension will do.

Or does the company just make the payment into the SIPP and the accountants record it when doing the year end audit?

Yep. an employer contribution to the pension is all that is needed.  Do note, that for it to qualify for reducing your corporation tax, it does need to have come by way of trade and you need to be wary of your profit as you wont get your CT bill reduced if there is no CT to pay.   Plus, the contribution has to be appropriate for the role of the individual.   A share holding director would not have any issue but a spouse company secretary could. 

Is the amount limited to the amount of earned non dividend income, or is that only when the director pays the contribution themselves?

Salary only impacts on personal contributions.  Not employer contributions.

Marcon

Make sure the pension provider knows it is a company contribution and also make sure it comes from the company's bank account. Both sound blindingly obvious but you'd be amazed how many people cheerily pay the contribution themselves and then reclaim from their company...can create a whole host of problems.

Barry_Bear

Thank you both. 

Example:
£100,000 profit = £18,000 CT leaving up to £72,000 for dividends liable to personal tax, versus £100,000 profit used to pay £40,000 into SIPP leaving £60,000 = £10,800 CT leaving £49,200 for dividends. The director gets £22,800 less in dividends now in order to boost their SIPP by £40,000, so they are (on paper at least) £17,200 better off.

Is my calculation and assumption here correct?

If so isn't it something all small own company directors should be doing instead of paying dividends if the company has profits? Have I missed a downside?

If the company has more than one director and all have existing SIPPs can each director choose how much to have paid into their SIPP?

Does a director have to be UK resident to have contributions paid into their SIPP by the company?

 

Prism

Barry_Bear said:

Thank you both. 


If so isn't it something all small own company directors should be doing instead of paying dividends if the company has profits? Have I missed a downside?

 

If the director doesn't need the instant payment of the dividends and is happy to wait until they are 55+ then yes its more tax efficient. Its generally more tax efficient in general to pay as little dividends and you can live on and then hold the rest back in the company or pay it into the pension. Its times like this that I built up a considerable pot in my limited company which allows me to pay dividends for the next couple of years even with no more earnings. 

Barry_Bear

Prism said:

Barry_Bear said:

Thank you both. 


If so isn't it something all small own company directors should be doing instead of paying dividends if the company has profits? Have I missed a downside?

 

If the director doesn't need the instant payment of the dividends and is happy to wait until they are 55+ then yes its more tax efficient. Its generally more tax efficient in general to pay as little dividends and you can live on and then hold the rest back in the company or pay it into the pension. Its times like this that I built up a considerable pot in my limited company which allows me to pay dividends for the next couple of years even with no more earnings. 

Thanks Prism.
If you have retained profits in the company I assume you would take those out as dividends if you needed the income, and there is no benefit in having those paid into a SIPP as corporation tax has already been paid on these funds?

Dox

Barry_Bear said:

Prism said:

Barry_Bear said:

Thank you both. 


If so isn't it something all small own company directors should be doing instead of paying dividends if the company has profits? Have I missed a downside?

 

If the director doesn't need the instant payment of the dividends and is happy to wait until they are 55+ then yes its more tax efficient. Its generally more tax efficient in general to pay as little dividends and you can live on and then hold the rest back in the company or pay it into the pension. Its times like this that I built up a considerable pot in my limited company which allows me to pay dividends for the next couple of years even with no more earnings. 

Thanks Prism.
If you have retained profits in the company I assume you would take those out as dividends if you needed the income, and there is no benefit in having those paid into a SIPP as corporation tax has already been paid on these funds?

A company pension payment doesn't distinguish in terms of 'where' it comes from; you get corporation tax relief on company pension contributions, subject to the caveats above about total amount being reasonable etc.

Barry_Bear

Dox said:

Barry_Bear said:

Prism said:

Barry_Bear said:

Thank you both. 


If so isn't it something all small own company directors should be doing instead of paying dividends if the company has profits? Have I missed a downside?

 

If the director doesn't need the instant payment of the dividends and is happy to wait until they are 55+ then yes its more tax efficient. Its generally more tax efficient in general to pay as little dividends and you can live on and then hold the rest back in the company or pay it into the pension. Its times like this that I built up a considerable pot in my limited company which allows me to pay dividends for the next couple of years even with no more earnings. 

Thanks Prism.
If you have retained profits in the company I assume you would take those out as dividends if you needed the income, and there is no benefit in having those paid into a SIPP as corporation tax has already been paid on these funds?

A company pension payment doesn't distinguish in terms of 'where' it comes from; you get corporation tax relief on company pension contributions, subject to the caveats above about total amount being reasonable etc.

Your reply was in answer to my post asking about retained profits, so are you saying the amount that a company can pay into the directors SIPP and get tax relief is not limited to just the latest years trading profits?

Example balance sheet reserves:
Share capital £1000
Retained earnings £230,000
Net Assets/Shareholders Funds £231,000

So are you saying then that if there is accumulated retained profits on the balance sheet from previous years e.g above £230,000, then some or all these P&L retained earnings reserves can be paid by the company directly into the directors SIPP, and the company gets back corporation tax refund on the amount paid into the SIPP? Sounds too good to be true. Is the refund at current CT rates?

Prism

Barry_Bear said:

Prism said:

Barry_Bear said:

Thank you both. 


If so isn't it something all small own company directors should be doing instead of paying dividends if the company has profits? Have I missed a downside?

 

If the director doesn't need the instant payment of the dividends and is happy to wait until they are 55+ then yes its more tax efficient. Its generally more tax efficient in general to pay as little dividends and you can live on and then hold the rest back in the company or pay it into the pension. Its times like this that I built up a considerable pot in my limited company which allows me to pay dividends for the next couple of years even with no more earnings. 

Thanks Prism.
If you have retained profits in the company I assume you would take those out as dividends if you needed the income, and there is no benefit in having those paid into a SIPP as corporation tax has already been paid on these funds?

Yes corporation tax has been paid but it gives me flexibility to pay myself dividends in times like these currently, or pay my full 40K SIPP allowance in future years should I desire.