Ltd Co Pension - what is my best course of action?

MrsMossMarkOne

I'm a Director of two Ltd Co.'s - one based on my professional work and one a company owning property. I work very part-time and bring in £40K in my professional Ltd Co and £30K profit in the property company. I am in my early 50's and want to maximise the tax advantages of paying a Director's pension. I pay myself the optimal Director's salary plus some dividends but pay a hefty tax bill and leave profits in the company. What would be the best way to maximise my position? I was thinking of paying a £15K lump sum per annum into a Vanguard Target Retirement Fund. I have one ISA that is doing ok but is using a Director's pension more tax efficient? My accountant is reluctant to offer any possible scenarios as he is unable to offer pension advice and is rightly cautious. I keep asking him 'from an accounting perspective' questions but I have to do all the running, he's not forthcoming with best-case advice for my situation. All opinions welcome. 

dunstonh

I have one ISA that is doing ok but is using a Director's pension more tax efficient?

Assuming the money would be drawn from either post retirement, then the pension would trump the ISA in tax efficiency in most scenarios.

My accountant is reluctant to offer any possible scenarios as he is unable to offer pension advice and is rightly cautious.

He should be able to answer from an accountants perspective generically. He is not able to give specific advice though.   

Marcon

MrsMossMarkOne said:

I'm a Director of two Ltd Co.'s - one based on my professional work and one a company owning property. I work very part-time and bring in £40K in my professional Ltd Co and £30K profit in the property company. I am in my early 50's and want to maximise the tax advantages of paying a Director's pension. I pay myself the optimal Director's salary plus some dividends but pay a hefty tax bill and leave profits in the company. What would be the best way to maximise my position? I was thinking of paying a £15K lump sum per annum into a Vanguard Target Retirement Fund. I have one ISA that is doing ok but is using a Director's pension more tax efficient? My accountant is reluctant to offer any possible scenarios as he is unable to offer pension advice and is rightly cautious. I keep asking him 'from an accounting perspective' questions but I have to do all the running, he's not forthcoming with best-case advice for my situation. All opinions welcome. 

'From an accounting perspective' isn't advice; it's a simple set of facts. 'Best case' is perilously close to advice, so I can understand why your accountant is correctly fighting shy of providing any such opinion.

Employer contributions paid direct from the company's bank account to an employee's pension scheme qualify for corporation tax relief provided they meet the requirement of being 'wholly and exclusively' for the benefit of the business. Provided you are a true 'working director' (sounds as if you are, in respect of your professional work) it is unlikely HMRC would challenge a contribution - certainly not one of £15K per annum.

Contributions are charged to your P&L account in the company accounting year in which they are paid.

deedee71

You pay yourself circa £8k from each company?  You will get tax relief on contributions up to 100% of salary, not on anything above.  You may find a better "optimal" number with a higher salary and higher pension contributions to reduce your hefty tax bill - is that your personal tax or your company tax,  it's not clear?  Probably best to put some numbers in a spreadsheet and see what the best number is.   There's isn't a specific Director's pension it would be a SIPP or stakeholder pension.

Marcon

deedee71 said:

You pay yourself circa £8k from each company?  You will get tax relief on contributions up to 100% of salary, not on anything above.  You may find a better "optimal" number with a higher salary and higher pension contributions to reduce your hefty tax bill - is that your personal tax or your company tax,  it's not clear?  Probably best to put some numbers in a spreadsheet and see what the best number is.   There's isn't a specific Director's pension it would be a SIPP or stakeholder pension.

No - employer contributions aren't limited to earnings, whereas personal contributions are.

deedee71

Marcon said:

deedee71 said:

You pay yourself circa £8k from each company?  You will get tax relief on contributions up to 100% of salary, not on anything above.  You may find a better "optimal" number with a higher salary and higher pension contributions to reduce your hefty tax bill - is that your personal tax or your company tax,  it's not clear?  Probably best to put some numbers in a spreadsheet and see what the best number is.   There's isn't a specific Director's pension it would be a SIPP or stakeholder pension.

No - employer contributions aren't limited to earnings, whereas personal contributions are.

I get what you're saying Marcon but unlimited employer pension contribution from a sole director limited company could be construed as tax avoidance.  

zagfles

deedee71 said:

Marcon said:

deedee71 said:

You pay yourself circa £8k from each company?  You will get tax relief on contributions up to 100% of salary, not on anything above.  You may find a better "optimal" number with a higher salary and higher pension contributions to reduce your hefty tax bill - is that your personal tax or your company tax,  it's not clear?  Probably best to put some numbers in a spreadsheet and see what the best number is.   There's isn't a specific Director's pension it would be a SIPP or stakeholder pension.

No - employer contributions aren't limited to earnings, whereas personal contributions are.

I get what you're saying Marcon but unlimited employer pension contribution from a sole director limited company could be construed as tax avoidance.  

Wouldn't have thought so unless OP isn't doing work to that value. Normal employees can sal sac down to min wage, resulting in high employer contributions and a low wage. But that's a question for his accountant, it's more business accounting than a pension question.

dunstonh

deedee71 said:

Marcon said:

deedee71 said:

You pay yourself circa £8k from each company?  You will get tax relief on contributions up to 100% of salary, not on anything above.  You may find a better "optimal" number with a higher salary and higher pension contributions to reduce your hefty tax bill - is that your personal tax or your company tax,  it's not clear?  Probably best to put some numbers in a spreadsheet and see what the best number is.   There's isn't a specific Director's pension it would be a SIPP or stakeholder pension.

No - employer contributions aren't limited to earnings, whereas personal contributions are.

I get what you're saying Marcon but unlimited employer pension contribution from a sole director limited company could be construed as tax avoidance.  

Shareholding directors can pay the full £40k in from the company (and carry forward if applicable) without HMRC being concerned.      It has to be by way of trade and the company needs to have a profit to make it viable.

Tax avoidance using allowances is perfectly legal.   Tax evasion is not.

Where there has been issues in the past with directors is where the spouse is not a shareholding director and holds an "on paper" role.  Often cleaner or secretary.   Pension contributions for them, in that scenario, would be limited.      However, if the spouse is also a shareholding director then they can pay in £40k (plus carry forward) as well.

deedee71

I'm happy to stand corrected.  Attention from HMRC I certainly wouldn't want though.

MrsMossMarkOne

dunstonh said:

deedee71 said:

Marcon said:

deedee71 said:

You pay yourself circa £8k from each company?  You will get tax relief on contributions up to 100% of salary, not on anything above.  You may find a better "optimal" number with a higher salary and higher pension contributions to reduce your hefty tax bill - is that your personal tax or your company tax,  it's not clear?  Probably best to put some numbers in a spreadsheet and see what the best number is.   There's isn't a specific Director's pension it would be a SIPP or stakeholder pension.

No - employer contributions aren't limited to earnings, whereas personal contributions are.

I get what you're saying Marcon but unlimited employer pension contribution from a sole director limited company could be construed as tax avoidance.  

Shareholding directors can pay the full £40k in from the company (and carry forward if applicable) without HMRC being concerned.      It has to be by way of trade and the company needs to have a profit to make it viable.

Tax avoidance using allowances is perfectly legal.   Tax evasion is not.

Where there has been issues in the past with directors is where the spouse is not a shareholding director and holds an "on paper" role.  Often cleaner or secretary.   Pension contributions for them, in that scenario, would be limited.      However, if the spouse is also a shareholding director then they can pay in £40k (plus carry forward) as well.

Thanks for everyone's input, especially this, as it has clarified it all in my mind and enabled me to go back to my accountant and ask pertinent questions.
For example, if a company has £40K profit (after deductions and paying me a salary of £10K plus the minimum dividend allowance) I understand that it is legitimate to pay a company contribution of up to £40K into my pension. I need very little to live on at this stage but I have a tiny pension pot (about £30K). This seems to be a really tax-efficient way of using the allowance to the full, building a pension pot quickly (I'm in my 50's), and utilising profit rather than leaving it in the company to withdraw at a later stage.

I had planned on leaving a fair amount in the company to continue to pay myself when I start working less (the plan was to taper down my hours around 60) but this seems a better way to use the funds available. I could make a £20K contribution from each company. Are there any holes in my plan I've not considered? I am the sole director for both companies.

mika_dm

You just need to be aware, that you cannot access your money from SIPP until you get to the age of 57.