Pension contribution

[melonfool]

Hi all

I am trying to work out how much I can put in my SIPP this year and wonder if anyone can help me work it out please?

background:

1) I am currently employed in a role that started mid Sept, on £75kpa, but I put 35% of that into the pension, employer pays 15% (a 12m contract)
2) From April to end May I worked via my own Ltd co, all fees went directly there and I drew nothing, there has been other income to the Ltd co since then as well
3) I had a small income from JSA Aug/Sept (£c700) which I owe tax on in my next return
4) All of this means I am not a HR tax payer this tax year
5) My Ltd co has c£40k in it
6) I am a director of the company, and owner, but not technically an employee as I don't draw any salary nor do I complete RTI, for completeness I also have not drawn any dividends this year (and I don't think I will, though I might take the £2k income tax free depending on the answer re pension)

Previous tax year's pension contributions look like this:

2017/18 - £21,993
2018/19 - £27,199
2019/20 - £29,242

This tax year, employer conts plus a nominal amount I put in to open a new SIPP look likely to be c£21,000

The key question is - can I put the money from the Ltd co into the pension this tax year, even though I am not an employee?

Not all of that money was 'earned' this year, about half of it was in the previous tax year and has already had corp tax paid on it, the other half is from this tax year. Annoyingly, I put off paying into the pension last tax year due to Coronavirus and general uncertainty, which has cost me about £6k in tax.

I can ask my accountant this question, and will do, but I wondered if any Lemonfools had any insights or suggestions.

Thanks
Mel

[mearnsfool]

You can pay in £40k gross this tax year less what your what your other employer and you have paid in.

If you had any existing pension in the last four years it makes not a difference if you paid into them just that they were open and in existence, you can pay in £40k gross for those years before the 5th of April 2021 less what the gross pension payments were for 17/18, 18/19 and 19/20 what the gross is for this year. On April 6th the 17/18 allowance is lost

How do you fund that big payment, let’s look at your situation?

Your limited company has £40k in it. Say £1k for various company expenses so £39k left. You can pay that £39k into a pension but you cannot cause a loss in the company from doing this. So it must be cash in the Ltd company account.

You can then from your wages in your employed £75k job make up what is left of the carry forward allowance but you can pay no more in pension contributions from you £75k job than what your earnings are this year. It is unlikely that you can put in 4 times £40k as your earnings this year at roughly 50% of £75k as you did not work there April to September are a bar to the full allowance.

In saying that April 6th this year you still have access to 18/19 19/20 and 20/21 to possibly pay in more money to your pension.

You do have to look if tying up that money makes sense and not have the tax relief tail wagging the have a life dog.

[taken2often]

A simplistic suggestion is to put 40k into the sipp from you and your employer's income. With regard to your company funds you could have two options if not already in use. Depending on the shares, you may have to increase the number by diluting them. After all the bills are paid you ask your account for a value per share. You can then use this to sell shares to the company and use the £12,300 capital gains allowance. There is a small charge for this but your accountant will do the documentation.

What I do in similar circumstances to you, is use the company funds to pay a lot of expenses, vehicle costs, insurances, medical insurance, telephones and some misc etc. But each year I pay the company 25% of what I consider benefit in Kind. Telephones, Medical Insurance and some misc. This year I changed my heating, Consumer unit, hot water system. I use one of my rooms as an office. So my 25% was quite high but still a bargain. With the payback no need to advise HMRC of Benefit in Kind. Some years you may have a big car repair, or building repair bill. I end up paying very little corporation tax.

Remember to much in pensions may trigger LTA tax. Should also be building up the ISA to cover early retirement.

Hope some of this is helpful

[mearnsfool]

I assume taken2often you have not had an audit of your accounts by HMRC as to be honest you appear to be taking these company expenses to the extreme.

[bluedonkey]

I'm sorry, but I have to say it would be unwise to follow taken2often's tax advice on this occasion.

[melonfool]

Hi all

Thank you for the responses.

Don't worry, I won't be increasing my 'expenses'. Currently I claim: my mobile phone bill (£8pm, not going to set any hares running); £5 per week for 'use of premises'; stationery (ink, paper); my professional subscription and travel costs and subsistence when out and about (none in the last year!). I also put through things like a new laptop and phone every couple of years and recently I had to have a new router so I'll claim that. That's about it. Obviously the company direct costs like insurance, accountancy etc.

I don't think selling my shares to the company makes any sense - I am the only owner and director (and 'employee', though I am not an employee) so I can't see how that would work, but I will ask my accountant for next year.

Re ISA etc - I should say I am 53 this year, so no pension money is going to be tied up for long, should I require it. But I do also have over £100k in S&S/Cash ISA/other savings/premium bonds. My S&S ISA brings in about £3kpa in dividends though I don't take them out. From my current salary (role due to end Sept) I save c£1k pm. And absolutely no worries about the LTA, I will never get anywhere near it.

So, to the pension conts, which I feel I need to make today:

"You can pay in £40k gross this tax year less what your what your other employer and you have paid in."

That bit I can do - the remainder is £19,526 (assuming they make this year's payment before 6th April which I think they will do).

But, I have paid in £5,100 elsewhere, so that leaves £14,426

My gross income this tax year has been just over £40k

So, from the company I can put that £14k. Or I could put it in from my own 'earned' funds and get the tax relief that way, though I think the effect is the same and I am cognizant of the 'have a life' part of the equation and I want a new dishwasher

This leaves money in the company.

I was under the impression that a director of a company could make a pension payment as an expense to the company even if there were no earnings to cover it - it's a remuneration package? If this is correct, do I still have the £40k earnings cap for this year anyway?

Also, while I have previous year's allowances I can bring forward, do I need to have earnings in this tax year to cover them as well? If so, it's all moot because I don't so I just stop there!

I think, on balance, I might just put £14k in from the company and take a £10k dividend. This will cost me £1,900 in corp tax and £600 in personal tax, but it's one way to take money out of the company. I don't think this pushes me into the HRT bracket, when the £5,100 pension contribution is taken into account.

Thanks all

Mel

[ursaminortaur]

Also, while I have previous year's allowances I can bring forward, do I need to have earnings in this tax year to cover them as well? If so, it's all moot because I don't so I just stop there!

Yes, you cannot put in more than this years earnings and get tax-relief. Thus you cannot use carry-forward unless your earnings this year are more than £40,000 and if you do have earnings this year above £40,000 the maximum carry-forward you could use is that excess earnings over £40,000.

[PinkDalek]

OT to your main question and I hope this reply doesn't divert further.

... I don't think selling my shares to the company makes any sense - I am the only owner and director (and 'employee', though I am not an employee) so I can't see how that would work, but I will ask my accountant for next year. ...

I didn't fully understand what was suggested but, in your circumstances, I believe the summary contents below would be relevant such that a successful clearance application wouldn't be possible and the Company Purchase of Own Shares would be treated as a distribution (subject to a minimal deduction for the initial subscribed share capital) and subjected to your appropriate Income Tax rates and not Capital Gains Tax.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/796707/seeking_clearance.pdf

Which commences Most payments made by a company to its shareholders in respect of their shares will be qualifying distributions and may be subject to Income Tax. ....

See also https://www.gov.uk/government/publications/statement-of-practice-2-1982/statement-of-practice-2-1982.

[melonfool]

Also, while I have previous year's allowances I can bring forward, do I need to have earnings in this tax year to cover them as well? If so, it's all moot because I don't so I just stop there!

Yes, you cannot put in more than this years earnings and get tax-relief. Thus you cannot use carry-forward unless your earnings this year are more than £40,000 and if you do have earnings this year above £40,000 the maximum carry-forward you could use is that excess earnings over £40,000.

Thank you - I am sure I read on the 'running your own company' board that people make pension contributions and have no 'pay/income' at all.

I cannot find any reference to this on any tax websites though so maybe I misunderstood.

Mel

[ursaminortaur]

Also, while I have previous year's allowances I can bring forward, do I need to have earnings in this tax year to cover them as well? If so, it's all moot because I don't so I just stop there!

Yes, you cannot put in more than this years earnings and get tax-relief. Thus you cannot use carry-forward unless your earnings this year are more than £40,000 and if you do have earnings this year above £40,000 the maximum carry-forward you could use is that excess earnings over £40,000.

Thank you - I am sure I read on the 'running your own company' board that people make pension contributions and have no 'pay/income' at all.

I cannot find any reference to this on any tax websites though so maybe I misunderstood.

Mel

You can personally contribute £3600 gross without any relevant earnings. As to employer contributions they count towards your annual allowance but you get no tax relief on the amount paid into the pension by the employer (instead the employer gets tax relief because the contributions are treated as a business expense)

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/tax-relief-employer/#

Tax relief on employer contributions is given by allowing pension contributions to be deducted as a legitimate business expense.


I suppose an employer could make a £40,000 contribution using up this year's annual allowance which would then allow the employee to make either a £3600 gross contribution or a gross contribution upto the levels of their earnings and use the carry forward of previous year's unused allowance to cover those contributions. That isn't something I'd considered before but think it should be possible.

[melonfool]

I suppose an employer could make a £40,000 contribution using up this year's annual allowance which would then allow the employee to make either a £3600 gross contribution or a gross contribution upto the levels of their earnings and use the carry forward of previous year's unused allowance to cover those contributions. That isn't something I'd considered before but think it should be possible.

Yes, in that scenario - Mel's Co could pay the £40k from the business account (assuming the account has that), and Mel's employer could pay the c£20k they have paid and Mel could pay the difference between the latter £20k and the leftover from the year's £40k earnings using previous years headroom (another £20k in this case as earnings were c£40k).

?

Mel

[mc2fool]

OT to your main question and I hope this reply doesn't divert further.

... I don't think selling my shares to the company makes any sense - I am the only owner and director (and 'employee', though I am not an employee) so I can't see how that would work, but I will ask my accountant for next year. ...

I didn't fully understand what was suggested but, in your circumstances, I believe the summary contents below would be relevant such that a successful clearance application wouldn't be possible and the Company Purchase of Own Shares would be treated as a distribution (subject to a minimal deduction for the initial subscribed share capital) and subjected to your appropriate Income Tax rates and not Capital Gains Tax.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/796707/seeking_clearance.pdf

Which commences Most payments made by a company to its shareholders in respect of their shares will be qualifying distributions and may be subject to Income Tax. ....

See also https://www.gov.uk/government/publications/statement-of-practice-2-1982/statement-of-practice-2-1982.

Well I haven't read the whole of those but on page 1 of the first link it says:

"Condition A: The purchase must be made wholly or mainly for the purpose of benefiting the trade carried on by the company and not form part of a scheme or arrangement where the main purpose or one of the main purposes is to enable the seller to participate in the profits of the company without receiving a dividend or the avoidance of tax."

IIUC, the latter part (avoidance of tax) is exactly what was being proposed.

[taken2often]

Another reply to disappear. It is possible that someone thinks I was proposing something illegal, which I was not and zapped it. I was expanding on my previous reply. I think I have a watcher.

Moderator Message:
I have checked the logs and no posts of yours have been deleted in the past two days.

[taken2often]

So I will try again although trying to remember what I wrote at my age is difficult.

With regard to expenses my income comes from rented property and share investments. I operate from home but do not claim any capital deduction as this would effect long term Capital Gains. I do need all the services that an office would need and use so expenses are deductable. Being my home does bring in the problem of Benefit in Kind. This I pay at 25% as a notional rate to cover all sorts of misc. I have been doing this for 20 years my account a very honorable man would certainly have corrected me if I was being incorrect. Remember taking income and Benefits in Kind do have a tax implication. If you do not take either no problem.

With regard to the sale of shares. You have to remember that once Corporation tax has been paid then the funds in the company belong to the shareholders and are available to them. If you take the Capital gains and have not left enough to pay debts and taxes, that would be a problem.
Two directors with 50% shareholding both agreeing to sell a number of shares each year, based on the value provided by the Accountant and within the personal Capital Gain allowance, can be taken. We have done this for the last 20 years and cleaned out the retained profits. Reducing our holding to zero then closing the company last year. If the interest rates had not been reduced to zero we would still be selling shares, to get to the present position.

You could pay a dividend but after the allowance you pay 7.5% plus more if you are in the higher tax bracket.

I should state that two companies are involved. The top one is still in operation and has retained profits and high shareholder funds. So I can do it all again. The second company is the one now closed.

[taken2often]

To Melonfool
At 53 you have 22 years until the 75 year test and we have no idea how the markets will run. How much you will put into your pensions and how much you take out. Just remember every time you take money out they tot up your percentage of LTA used. Hopefully the indexing of that, when and if it restarts would keep you out of trouble. 20 years ago I had no idea of the growth that I would achieve, and that was based on an income investing plan.
I just missed paying a lot of tax last year because of the March Correction. I have now bounced back within the year to the amount I would have to have paid, but my 75 year and last LTA Test is passed. A big part of the recovery came from the annual income I have generated over the past 20 years.
The markets may go down but the income only moderately. Which was used to buy cheaper income and so it continues compounding growth.

I now have a SIPP that I will never draw.

Bob

[melonfool]

My aim is to get my pension fund to £400k and my equities ISA to £100k and then stop putting money in, at least stop putting money into the former.

I have c£120k to go (£100k for the pension and £20k for the ISA) which I am hoping to do within three years. When I hit those targets I plan to stop working in boring corporate jobs that pay well and do something more socially useful that pays peanuts, but I won't need to worry about my longer term financial stability so I'd just need enough to live on for the years to retirement. I might run my business alongside this for a few years, it brings in about £10k pa currently (last year was different because I had a contract that was paid into the business, I don't anticipate that happening again due to IR35 laws, but I also will not seek that type of contact).

I am extremely unlikely to ever hit the LTA.

Mel

[PinkDalek]

Purchase of own shares

I'll confess that what you've described so far continues to be a mystery to me but may be of interest!

... With regard to the sale of shares. ... Two directors with 50% shareholding both agreeing to sell a number of shares each year , based on the value provided by the Accountant and within the personal Capital Gain allowance, can be taken. We have done this for the last 20 years and cleaned out the retained profits. Reducing our holding to zero then closing the company last year. ...

I should state that two companies are involved. The top one is still in operation and has retained profits and high shareholder funds. So I can do it all again. The second company is the one now closed.

1. Can you explain further and what do you mean by the top company?

2. Has the top company been purchasing the shares in the other company from the director shareholders or is it the other company that was purchasing direct from the director shareholders for cancellation?

3. Anyway, how does this all get round Condition A section 1033 Corporation Tax Act 2010 and what disclosure has been made to HMRC regarding this 20 year scheme or arrangement?:

https://www.legislation.gov.uk/ukpga/2010/4/part/23/chapter/3/crossheading/purchase-of-own-shares

2) Condition A is that—

(a) the redemption, repayment or purchase is made wholly or mainly for the purpose of benefiting a trade carried on by the company or any of its 75% subsidiaries,

(b)the redemption, repayment or purchase does not form part of a scheme or arrangement the main purpose or one of the main purposes of which is—

(i) to enable the owner of the shares to participate in the profits of the company without receiving a dividend, or

(ii) the avoidance of tax, and

(c) the requirements set out in sections 1034 to 1043 (so far as applicable) are met.

4. Were clearance applications made each and every year?

[taken2often]

PinkDalek

The top company referred to is an ongoing company. No income or sale of shares takes place yet. The other company now closed had retained profits going back 20 years. These were class A companies. Our money ,our shares, so our choice as to how to dispose of these funds and our timescale.

Where corporation tax was due it was paid. This was not a scheme to avoid that. Just a way of obtaining the retained profits within the law.
Twenty years ago we could have split the funds 50/50 taken that years allowance and paid the excess tax. We could have paid a dividend but we decided on using it as a pension and use our legal entitlement, until the funds were done and we closed the company.

Each year we had a board meeting and the company offered to buy a number of shares usually on or below the CG allowance. Acceptance of the payment was the transfer of the shares. Our accountant then filled out a form to advise company house of the change in shareholding. Job done

Quoted shares would be much more difficult, although some companies may pay out a return of capital. This could still carry a capital gains charge, but the allowance would still be there. Some do offer to buy back shares but it has to be offered to all, and could still be liable for CG. Any offer pre Corporation tax would be fraught and I do not know of any.

[PinkDalek]

Purchase of own shares

...

That's explaining the mechanics of what was done but not how it gets round the legislation:

Maybe an article may assist https://www.taxadvisermagazine.com/article/purchase-own-shares

Extract only:

CTA 2010 s 1000 provides that where a company buys back its own shares from an individual shareholder an income distribution occurs. Most share buy backs will therefore result in an income tax charge arising on the distribution, and to the extent that the proceeds exceed the repayment of share capital an income tax charge will arise at the shareholder’s marginal dividend tax rate.

I'm beginning to think we've had this conversation before in the dim and distant, maybe even at TMF.

I'll leave it there as I don't think you are understanding what I'm asking and I don't appear to be asking the right questions, despite numbering them in my reply before this one.

In particular:

3. Anyway, how does this all get round Condition A section 1033 Corporation Tax Act 2010 and what disclosure has been made to HMRC regarding this 20 year scheme or arrangement?

For the avoidance of doubt, I am not talking about Corporation Tax per se. I am talking about the Income Tax implications on the shareholders. Nothing you've said so far suggests what has happened is correctly treated as a chargeable gain. So be it.

[taken2often]

The Funds were taxed shareholder funds. It then depends on how you take these funds. It so happens that these shares were at nil cost. So the sum received if below the Capital Gains Allowance are not re-portable. Some years I in fact had other share sales of listed companies, some times gains some times losses. I then had to fill out the appropriate capital gain reporting work sheets for each share unlisted and listed fill the details int the CG reporting form your allowance is deducted and you either have tax to pay or not. This I have done many times over the years, it has never been questioned.

This process is not a re-portable scheme in the sense that you imply. There is no tax being avoided, It is just one of the options open to unlisted company shares. If you used the money to pay wages then there would be tax and NI. If you use it to pay interest it would be deductible

Hope this clearer. Perhaps the concept of having a large sums of taxed profits is a bit alien. Most peoples profits are either in stock or in their clients bank accounts.