Pension Contributions

[Newbie22]

Pension Contributions

As a limited company can I put “Employer Pension Contributions” through the profit and loss as an expense? I believe as its an approved pension scheme I can offset this against corporation as tax?

I would love some clarification from you Geniuses out there?

 

[gezzagregz]

The simple answer is yes, this is correct. Contributions are made as a business expense and offset against corporation tax (taxable profit).

 

[Truemanbrown]

Yes, this is correct.

Just be careful concerning the scale of the contributions that the company makes. For example, the Inland Revenue are not going to be too happy if your salary from the company is £5715 but the contribution to the scheme is £100,000. It is not unknown for an IFA to give such advice!

 

[downsouth]

care to tell us how?

surely info like this would be of an interest to many

 

[David Griffiths]

Just be careful concerning the scale of the contributions that the company makes. For example, the Inland Revenue are not going to be too happy if your salary from the company is £5715 but the contribution to the scheme is £100,000. It is not unknown for an IFA to give such advice!

There is no link between the level of salary and the amount of pension contribution that can be paid by a company. It won't be unknown for an IFA to give such advice, because the advice is correct.

(There have been some recent changes limiting the amounts of pension contributions paid, but those are quite separate)

 

[David Griffiths]

care to tell us how?

surely info like this would be of an interest to many

It is common practice for employer pension schemes to include death in service benefit as part of the package, and I think that the amount of cover is up to four times salary (I'm not an IFA, so would need to check to be certain of that) It's not a mysterious relief and anybody who takes advice on pensions and related matters should have this explained to them.

 

[downsouth]

Cheers David, well having recently kicked off a company contributed pension I wasn't aware of this, i'll pop the IFA a note now

Do you know if its based on 'actual PAYE' salary or inclusive of dividend payments?

 

[David Griffiths]

Cheers David, well having recently kicked off a company contributed pension I wasn't aware of this, i'll pop the IFA a note now

Do you know if its based on 'actual PAYE' salary or inclusive of dividend payments?

My initial reaction was salary only, but as I say this isn't my field and a bit of googling suggests that not only can dividends be included, but that the multiple might be higher than four as well. In real life we have an in house IFA who deals with all of this.

 

[Truemanbrown]

There is no link between the level of salary and the amount of pension contribution that can be paid by a company. It won't be unknown for an IFA to give such advice, because the advice is correct.

(There have been some recent changes limiting the amounts of pension contributions paid, but those are quite separate)

From 6 April 2006, in order to qualify for tax relief, any pension contributions are now required to meet the conditions normally applied to any other business expenditure; that is, they must be incurred 'wholly and exclusively' for business purposes. This is the case for trading companies, while companies that engage in investment activities must be able to show that their pension contributions meet the criteria for management expenses. Thus, pension contributions can be seen simply as another business expenditure that must be accounted for when calculating your profits chargeable to corporation tax.



Inland Revenue have given guidance concerning how the test of 'wholly and exclusively' applies specifically to pensions. They say that there must be a viable business reason if pensions paid to shareholding employees are higher than those paid to non-shareholding employees of a similar value to the company.

Furthermore, if an employee seems to have a comparatively low salary but a high level of employer's pension contributions then it must be proved that this is not as a result of National Insurance liability planning.

I know I may sound a bit pedantic, but the OP should be made aware of the above.

 

[Philip Hoyle]

Furthermore, if an employee seems to have a comparatively low salary but a high level of employer's pension contributions then it must be proved that this is not as a result of National Insurance liability planning.

I can't see this point in the HMRC guidance - would you care to share with us where HMRC have said this.

 

[David Griffiths]

From 6 April 2006, in order to qualify for tax relief, any pension contributions are now required to meet the conditions normally applied to any other business expenditure; that is, they must be incurred 'wholly and exclusively' for business purposes. This is the case for trading companies, while companies that engage in investment activities must be able to show that their pension contributions meet the criteria for management expenses. Thus, pension contributions can be seen simply as another business expenditure that must be accounted for when calculating your profits chargeable to corporation tax.



Inland Revenue have given guidance concerning how the test of 'wholly and exclusively' applies specifically to pensions. They say that there must be a viable business reason if pensions paid to shareholding employees are higher than those paid to non-shareholding employees of a similar value to the company.

Furthermore, if an employee seems to have a comparatively low salary but a high level of employer's pension contributions then it must be proved that this is not as a result of National Insurance liability planning.

I know I may sound a bit pedantic, but the OP should be made aware of the above.

The only criterion is if the expenditure is wholly and exclusively for the purposes of the trade. In the example you quoted, the total remuneration package for the director is £105,000 - £5k salary and £100k pension.

The Revenue have to consider the position relating to the package as a whole and cannot split it into its constituent parts. If a package of £100k salary and £5k pension is allowable, then any combination of reward that adds up to that figure is allowable.

Taking the matter further, if a company has made profits of £X, it is very difficult for the Revenue to argue that a director's remuneration package which is very close to £X is not tax deductible. Without the director's input, the company may not have made any money at all.

Do you have a link to the guidance referred to your second paragraph? In practice, who are the Revenue to judge the value of an employee to the company relative to others? In the great majority of owner managed businesses the directors are more valuable than the other staff by a country mile.