Ltd Company Pension Contributions

billy2shots

Firstly I will be running this past my accountant on Thursday this week but wanted to pick the forums brains prior. 

As a Director of my own Ltd Company the plan for this year was to maximise Pension contributions.


- This years allowance plus carry forward for the past 3 years gives me £100,000 scope to contribute (or so I thought)

- i meet the criteria to use carry forward (ongoing business of 22 years, enrolled in a pension scheme for 3 years etc etc)


However I came across something that my fellow previous Directors and I were not aware of. On several tax planning sites the following is written 

Other factors HMRC will examine before allowing pension contributions via your limited company include:

• Checking that pension contributions aren't more than the company's annual profits. So, if your company turns a profit of £20,000 in a tax year, £20,000 will likely be the maximum the company can contribute to your pension for that year.

I am trying to get my head around this.

So if I have retained profits within the business, these couldn't be used for pension contributions if they exceed this year's profit?

That seems very strange considering corporation tax has already been paid on the profit and therefore HMRC are not missing out on tax.

Secondly if I wanted to make said £100,000 pension contribution then would I in theory need to have made over £200,000 pre tax profit. £100k then gets contributed to pension leaving the matching £100k+ profit (the + is to pay corporation tax leaving £100k profit). 

Looking back we (not me) have made £80k pension contributions before. Possibly more by luck than judgement, more than £80k remained in profit after this contribution.

As stated, I will be running this past my accountant but it's been on my mind a lot as this was my main vehicle for extracting funds this year and this stipulation / rule could throw a spanner in the works. 

Any experience of this?

Marcon

I don't think it is right, although plenty of websites confidently state it! See https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/pension-contributions-qa?utm_source=legacyurls&utm_medium=301&utm_campaign=/knowledge-literature/knowledge-library/pension-contributions-qa/&icid=banner_articles from which I've cut and pasted the following:

Q: Can an employer pay pension contributions in excess of their gross trading profit for an accounting period, and if so, how do they then claim corporation tax relief?

A: The company accountant should be able to give guidance, however, broadly speaking;

The pension “cost” will be shown as a business expense (there are different ways of calculating cost as between DC and DB schemes).

The employer gets a tax deduction for the corporation tax accounting period in which the contribution is paid.

That deduction reduces taxable profits and could create (or even increase) a loss.

There are various ways in which tax relief can be obtained for that trading loss. The main ones are:

• Carry forward against profits of the same trade
  
  
• Carry back against profits of the previous 3 accounting periods*
  
  
• Set-off against other (i.e. non-trading) income or capital gains of the same accounting period
  
  
• Surrender to other companies in the same group (if the loss making company is part of the same group). 

*Finance Act 2021 temporarily extends the period for which trading losses can be carried back against previous profits. This extension will apply to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022 and to trading losses made by unincorporated businesses in tax years 2020 to 2021 and 2021 to 2022.

Trade loss carry back will be extended from the current one year entitlement to a period of 3 years, with losses being carried back against later years first.

billy2shots

Marcon said:

I don't think it is right, although plenty of websites confidently state it! See https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/pension-contributions-qa?utm_source=legacyurls&utm_medium=301&utm_campaign=/knowledge-literature/knowledge-library/pension-contributions-qa/&icid=banner_articles from which I've cut and pasted the following:

Q: Can an employer pay pension contributions in excess of their gross trading profit for an accounting period, and if so, how do they then claim corporation tax relief?

A: The company accountant should be able to give guidance, however, broadly speaking;

The pension “cost” will be shown as a business expense (there are different ways of calculating cost as between DC and DB schemes).

The employer gets a tax deduction for the corporation tax accounting period in which the contribution is paid.

That deduction reduces taxable profits and could create (or even increase) a loss.

There are various ways in which tax relief can be obtained for that trading loss. The main ones are:

• Carry forward against profits of the same trade
  
  
• Carry back against profits of the previous 3 accounting periods*
  
  
• Set-off against other (i.e. non-trading) income or capital gains of the same accounting period
  
  
• Surrender to other companies in the same group (if the loss making company is part of the same group). 

*Finance Act 2021 temporarily extends the period for which trading losses can be carried back against previous profits. This extension will apply to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022 and to trading losses made by unincorporated businesses in tax years 2020 to 2021 and 2021 to 2022.

Trade loss carry back will be extended from the current one year entitlement to a period of 3 years, with losses being carried back against later years first.

Thanks, the above was my understanding. 

Shocked to see a dozen tax and or pension sites stating profits must match or exceed pension contributions. 

LHW99

I suspect the point is that HMRC can / will examine a payment that is much larger a) than that year's profit and b) much different to previous years' pension payments.

Whether they will then decide to take any action is the unknown.

billy2shots

LHW99 said:

I suspect the point is that HMRC can / will examine a payment that is much larger a) than that year's profit and b) much different to previous years' pension payments.

Whether they will then decide to take any action is the unknown.

With substantial retained profits that have already been subjected to corporation tax it seems very strange they can't be directed into pensions if the individual has allowance remaining. 

Wait until Richie gets in then I will be even more put out...

zagfles

billy2shots said:

LHW99 said:

I suspect the point is that HMRC can / will examine a payment that is much larger a) than that year's profit and b) much different to previous years' pension payments.

Whether they will then decide to take any action is the unknown.

With substantial retained profits that have already been subjected to corporation tax it seems very strange they can't be directed into pensions if the individual has allowance remaining. 

Wait until Richie gets in then I will be even more put out...

It would seem strange to me if they could. Employer pension contributions are a business expense and so should be treated like other business expenses eg your salary, and so surely be accounted for before corp tax is assessed not after. But speak to your accountant, this isn't really a pension question but a company accounting question and that's what your accountant is there for.

billy2shots

zagfles said:

billy2shots said:

LHW99 said:

I suspect the point is that HMRC can / will examine a payment that is much larger a) than that year's profit and b) much different to previous years' pension payments.

Whether they will then decide to take any action is the unknown.

With substantial retained profits that have already been subjected to corporation tax it seems very strange they can't be directed into pensions if the individual has allowance remaining. 

Wait until Richie gets in then I will be even more put out...

It would seem strange to me if they could. Employer pension contributions are a business expense and so should be treated like other business expenses eg your salary, and so surely be accounted for before corp tax is assessed not after. But speak to your accountant, this isn't really a pension question but a company accounting question and that's what your accountant is there for.

But if it was truly a business expense then it shouldn't be limited to matched or better profits. 
It should come out before profit is calculated. Well in my very naive view. 

Meeting with accountant on Thursday so I'm hoping for clarity then. 

ComicGeek

While I've looked into this before, the issue was with the completed accounts for the previous years. Our accountant said that it wasn't possible to amend the previous accounts to include the pension payments as expenses, as this would affect all of the corporation tax calculations/payments for those years as well. We were told that we had to make the pension contributions within that financial year to be taken into account, and that it wasn't possible to do this retrospectively. So I don't know how carry forward could work for employer pension contributions.

But then our accountant hasn't always been correct! Please let us know what your accountant says!

dunstonh

So I don't know how carry forward could work for employer pension contributions.

It works fine.  Carry forward doesn't change the date of the pension contribution.  Carry forward allows the use of unused allowances, but the contribution is still made in the current year.

billy2shots

dunstonh said:

So I don't know how carry forward could work for employer pension contributions.

It works fine.  Carry forward doesn't change the date of the pension contribution.  Carry forward allows the use of unused allowances, but the contribution is still made in the current year.

But according to multiple places on the net you can't use all the available carry forward even if you have the money in your account if that exceeds the current years profit. 


I'm really hoping someone made a mistake staying this then dozens of sites have been lazy copying the mistake. 

ComicGeek

billy2shots said:

dunstonh said:

So I don't know how carry forward could work for employer pension contributions.

It works fine.  Carry forward doesn't change the date of the pension contribution.  Carry forward allows the use of unused allowances, but the contribution is still made in the current year.

But according to multiple places on the net you can't use all the available carry forward even if you have the money in your account if that exceeds the current years profit. 


I'm really hoping someone made a mistake staying this then dozens of sites have been lazy copying the mistake. 

Perhaps it's just that the company can't claim corporation tax relief on employer pension payments where they exceed the current years profit (ie you can't have a negative corporation tax bill and claim money back from HMRC, where it hasn't been a genuine trading loss and you've just deliberately over contributed to pensions).