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Company Pension Contributions

I always thought they were free of Tax, has this changed since 6 April 2006? My accountant says they are now taxable unless Wholly and exclusively for the business. What does that mean?
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Comments

  • shaunrc
    shaunrc Posts: 207 Forumite
    Hi Mick

    I am an IFA who specialises in this area and so anything I say is help rather than advice as this has a specific regulated meaning.

    I think that your accountant may have grabbed the wrong end of the stick. However to confirm this I would need to know how much you paid into your pension and what your earnings (salary + any bonuses) were for the same tax year. Problems in this area usually come from amounts and size of contributions.If you are unhappy to broadcast this then feel free to private message me.

    Just to confirm,you business is a limited company isnt it?
    I am an Independent Financial Adviser. For regulated individuals like me there are rules on giving financial advice. Therefore any posts I make are meant to be helpful but are not financial advice.
  • Yes it is....

    I hate the idea of paying 40% tax.

    Currently I'm paying myself minimum wage and making up to the 40% threshold with dividends. I'm looking to pay any excess (if that's the right word) into a SIPP.

    What are the rules?
  • shaunrc
    shaunrc Posts: 207 Forumite
    Hi Mick

    I have put below the rules for such a payment. As you can see in practice the main reason it can be rejected is for the size of the payment and it is at the discretion of the local tax office. So without you being a little more specific about how much you paid into the SIPP ( I can figure out your earnings!) it is hard to be of more help.




    Payments from the employer are effectively unlimited, but they do not automatically qualify for tax relief. To be an allowable deduction against profits, the payments have to be "wholly and exclusively" for the purposes of the business in much the same way as any expense. In essence, this means that the payment should be at a reasonable level for the individual concerned.

    A pension payment is part of the overall cost of employing staff, and so the local tax office should allow the payment as a deduction unless, exceptionally, there is an identifiable non-trade purpose for the employer’s decision to make the payment, or for the size of the payment.
    I am an Independent Financial Adviser. For regulated individuals like me there are rules on giving financial advice. Therefore any posts I make are meant to be helpful but are not financial advice.
  • So far, I’ve paid £9k into my pension and am about to make that up to £12k. I would like to pay more but the accountant advises that my pension payments should equal salary. I guess that the options are to either pay a higher salary or take the rest in dividends and then invest outside a pension. I don’t fancy paying 20% Corp tax and then PAYE when drawing the money out of a pension.

    Do you know: If I make personal contributions to a pension, the pension company then claim 22% tax back and I claim another 18% on my tax return (if sufficient 40% tax paid). What happens if the personal contributions are made out of dividends received (assume over the 40% threshold so additional tax paid)
  • shaunrc
    shaunrc Posts: 207 Forumite
    Hi Mick

    It doesnt matter how you have been paid for tax relief on a pension, it does however matter how much! This is because you cannot get more tax relief than you have paid ( apart from the £3600 level set by stakeholder rules). For personal contributions you can be limited to what you have earned that year i.e paid income.

    The new rules allow employer contributions to exceed salary and maybe even the £215k annual limit in theory. I do not yet have a client who is able to exceed £215k as an employer contribution to find out. However it is not fixed by your salary.

    What you need is a good IFA to organise this as what I would do is simply speak to your tax office.
    I am an Independent Financial Adviser. For regulated individuals like me there are rules on giving financial advice. Therefore any posts I make are meant to be helpful but are not financial advice.
  • MickKnipfler
    MickKnipfler Posts: 1,983 Forumite
    Thanks Shaun,

    Maybe it's worth speaking to Hector. To be honest, I've found them to be a great help on other matters and certainly nothing to be aftraid of if you are only trying to understand how best to play by the rules....
  • Hector said that the maximum personal contributions are 100% of your salary. Didn't know about company contributions though....different department.

    Does anybody know what the limit is for company contributions?
  • jem16
    jem16 Posts: 19,491 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    Theoretically it's the same rule.

    However each company as far as I know can still set its own limits.
  • MickKnipfler
    MickKnipfler Posts: 1,983 Forumite
    OK but as I own the company, are there any rules over what limit I can set?

    Is the Net Relevant Earnings rule applicable to personal contributions or total contributions?

    After all, making company contributions isn't avoiding tax it's deferring tax.....
  • shaunrc
    shaunrc Posts: 207 Forumite
    Hi Mick

    In theory there is no limit to a company contribution. However there is the annual limit to consider which for this year is now £225k ( apologies for being a year behind with the numbers above). The actual rules state as shown above that in theory the payment is unlimited but that it needs to be checked with your tax office.

    I see you spoke to the personal section at the tax office, unfortunately the rules are different. To make progress you would need to talk to the company section. The rules have a type of reasonableness test which each tax office applies itself. You should find that they have a limit above which they question things and also a multiple of salary, but that may be too logical!
    I am an Independent Financial Adviser. For regulated individuals like me there are rules on giving financial advice. Therefore any posts I make are meant to be helpful but are not financial advice.
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