Can I and should I maximize my director pension?

gravlax

I'm director sole shareholder of 2 small businesses both Ltd companies, not connected and they don't do any transactions with each other.
I draw all my income (usually dividends) from the larger business. The other only makes a small profit every year, which I have allowed to accumulate in the reserves of the company for many years.
From the larger company I have paid some company directors pension contributions instead of a dividend. 
I know there's a limit of £40k per year for pension contributions from any source, and you can pay up to this allowance for any of the last 3 years where the full amount wasn't taken up. When the larger company has made enough profit to make a pension contribution up to the maximum I have done so.
So if there is a year when the larger company doesn't have enough profit to make any pension contributions, can the smaller company make a full £40,000 contribution from it's accumulated profits even though I have never drawn any income from the company? 
Normally the advantage of a company pension contribution is that it reduces corporation tax but I can see this advantage will be largely lost with the small company as the profits in any one  year are quite small, and a £40,000 contribution from the reserves will be paying out profits on which corporation tax was paid in previous years. 
But can the smaller company pay out all it's accumulated profits as a directors pension contribution, even if I haven't previously paid of any profits as salary or dividends?
Or is paying the profits into a pension not a good idea if there is little corporation tax benefit? Is there a better way to use the accumulated profits than into a pension?   

royalmike

Will be interested in replies to this question as well let me know what you find out.

Gary1984

Do you have an accountant? What do they say? 

Brynsam

gravlax said:

I'm director sole shareholder of 2 small businesses both Ltd companies, not connected and they don't do any transactions with each other.
I draw all my income (usually dividends) from the larger business. The other only makes a small profit every year, which I have allowed to accumulate in the reserves of the company for many years.
From the larger company I have paid some company directors pension contributions instead of a dividend. 
I know there's a limit of £40k per year for pension contributions from any source, and you can pay up to this allowance for any of the last 3 years where the full amount wasn't taken up. When the larger company has made enough profit to make a pension contribution up to the maximum I have done so.
So if there is a year when the larger company doesn't have enough profit to make any pension contributions, can the smaller company make a full £40,000 contribution from it's accumulated profits even though I have never drawn any income from the company? 
Normally the advantage of a company pension contribution is that it reduces corporation tax but I can see this advantage will be largely lost with the small company as the profits in any one  year are quite small, and a £40,000 contribution from the reserves will be paying out profits on which corporation tax was paid in previous years. 
But can the smaller company pay out all it's accumulated profits as a directors pension contribution, even if I haven't previously paid of any profits as salary or dividends?
Or is paying the profits into a pension not a good idea if there is little corporation tax benefit? Is there a better way to use the accumulated profits than into a pension?   

There are various issues being thrown into the mix here.

Any company pension contribution has to be proportionate and appropriate to the role of the person for whom it is made. HMRC are generally pretty relaxed where the individual is a working director and is employed by the company on a PAYE basis. It isn't clear from your question if that's the case in respect of your smaller company as you say you've never taken a salary from it?  Why are you letting the profits build up - what's the purpose of that?

Not sure you understand how CT works, especially where a pension contribution would give rise to a loss in the company's accounts. The best recent explanation I could find was this: https://www.galleyandtindle.co.uk/can-a-loss-making-company-make-pension-contributions/

Good explanation of carry forward here: https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/annual-allowance-carry-forward/

It does sound as if a chat with your accountant would be no bad thing, if only to clarify your options and strategy going forward.

gravlax

Thanks for the reply.
"Why are you letting the profits build up - what's the purpose of that?"
Just caution with a new business to start with. I didn't take any income because profits were quite small so I left them in the reserves as a buffer. Over the years it has slowly built up. 
Interesting point about if the company can still benefit from back-dated or future corporation tax relief on the contribution even if the one-off contribution creates a trading loss for that year.

Joey_Soap

I have made company pension contributions that led to a trading loss in the year of contribution. It was very nice that the loss was set aside profit/corporation tax for the previous year so I got a nice refund from HMRC. I gather here though, it's multiple previous years in question so it's not exactly like for like.

Brynsam

gravlax said:

Thanks for the reply.
"Why are you letting the profits build up - what's the purpose of that?"
Just caution with a new business to start with. I didn't take any income because profits were quite small so I left them in the reserves as a buffer. Over the years it has slowly built up. 

Might be worth thinking about taking some out - profits within a company can't normally be returned to a shareholder, or paid out to a sole director/shareholder, if the company runs into choppy waters. You could always add cash back in by means of a director's loan (i.e. a loan from a director, not to a director) if necessary for cash flow purposes.

gravlax

The useful link in the earlier post says that if the contribution creates a loss in the year then the CT can be claimed against the prior year profits. But in their example the company decides to pay a pension contribution based on profits for the year ending December but for an unexplained reason doesn't pay the contribution until the following May - in a later accounting period. Then follows the options for CT relief in which year.
If my company made a contribution it would be paid during the accounting period it relates to. So if the payment resulted in a loss for that period equivalent to several years previous and probable future profit, how or what decides whether CT is reclaimed from previous years (how far back, how many years?) would it be that there is no CT to pay in the current year (or would there be a CT refund?), and none in the following years until accumulated future profits exceed the loss in the year of the contribution?