A colleague has asked me a question and I am not sure of the answer.
He has a one-man company client who has realised too late that he should have arranged to pay a pension contribution of £50,000 out of the company into his company pension scheme in 2011/12. The company's accounting year ends on 31st March. Can the contribution paid on 20th April be accrued into the company's accounts to 31st March 2012 and corporation tax relief obtained?
I thought that pension contributions were one of those things that had to be actually paid in the year in question, but I would be grateful for other people's views.
Replies (12)
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Relief when paid
Your thoughts are correct, Euan. Relief is available only in the year of payment.
FA 2004 s196(2)(b)
I agree with you
No new research at this end so I can not provide you with a link, but it has long been my understanding that payment should clear the bank account in the accounting period to be deductible. No accrual permitted.
I'm with you on this one
Relief is only available when the contribution is actually paid in the accounting period, as per BIM 46010
http://www.hmrc.gov.uk/manuals/bimmanual/BIM46010.htm
Yes it needs to have been paid
It needs to have been paid in the period of accounts though. So it would be possible (if you've still got time) to extend the accounts to 30th April (or even just the 20th) and get relief for 12/13ths of your £50K in the accounting period to 31st March.
Too fast!
I, and others, leapt in with the obvious response that relief is obtained only when paid. But Steve makes the very good point that it is the period of account, rather than the accounting period, that is relevant and a short extension to that period of account could be beneficial. (And nothing to stop the company reverting to 31 March in the following period should it so wish).
Possibly
Don't take this as gospel, just off the top of my head, and gives room for further discussion....
Could you not accrue a bonus in the accounts & claim CT relief, then pay the bonus as a pension contribution in the next FY?
No
Don't take this as gospel, just off the top of my head, and gives room for further discussion....
Could you not accrue a bonus in the accounts & claim CT relief, then pay the bonus as a pension contribution in the next FY?
Because a bonus is a bonus and a pension contribution is a pension contribution. Otherwise, why not accrue a bonus and then pay the bonus as a dividend?
I'm not an accountant but I am trying to follow the discussion as much out of interest as for anything else. I usually manage to grapple with the HMRC BIM guidance just fine but finding the wording of this one just a little too technical.
Reading between the lines it seems that pension contributions may not be used to create a loss thereby offsetting previous a year's profit, is that correct?
A simplistic example, sticking with the one-man-band theme - say the company makes 100k one year and then nothing for then following year. If it pays 7k salary + 43k company pension contribution for each of the two years running, a) is this allowed and b) does it leave a net balance of zero or -10k ?
I think also it's spelt out in plain English here:
which if I understand it correctly, could be better worded: "...the company profits for that year must be greater than the contribution..."
Thanks.
@ozzy
A simplistic example, sticking with the one-man-band theme - say the company makes 100k one year and then nothing for then following year. If it pays 7k salary + 43k company pension contribution for each of the two years running, a) is this allowed and b) does it leave a net balance of zero or -10k ?
How do you arrive at -10k? (Answer a is correct, BTW)
I think also it's spelt out in plain English here:
which if I understand it correctly, could be better worded: "...the company profits for that year must be greater than the contribution..."
That is misleading - contributions in excess of profits will (provided they are not otherwise disallowable) create or increase loss.
Company pension contribution - excessive remuneration
How do you arrive at -10k? (Answer a is correct, BTW)
... contributions in excess of profits will (provided they are not otherwise disallowable) create or increase loss.
Thanks. I think I was confusing two different issues:
BIM46010 opens with "Employers’ contributions are deducted for the period of account in which they are paid by the employer, and for no other period,"
Since the OP mentioned "one-man company", I was also thinking about what BIM46035 had to say with regard to the pension contribution not being an allowable expense if the total remuneration package exceeded the value of the work undertaken. The interpretation of this (made elsewhere) being that for a one man co. the generated profit reflects the value of work undertaken and therefore the allowable level of company pension contribution.
In my simplistic example I had assumed these together meant that the pension contribution wouldn't be an allowed expense in the 2nd year because the profits were generated in a different accounting period.
Sorry for hijacking the thread.
Excessive remuneration
The interpretation of this (made elsewhere) being that for a one man co. the generated profit reflects the value of work undertaken and therefore the allowable level of company pension contribution.
I'm not sure where the "made elsewhere" is, but it is usually the case that the value of work undertaken is determined by turnover and not profit. Healthy though they may be, I'd be a little concerned if folks used my net profits as an indication of the value of my advice.
But in theory you have a point - in periods where little or no work is undertaken, remuneration - including, but not restricted to, pension contributions - might be considered excessive. This is unlikely to be the case if there has been a one-off drop in activity, but if the non-activity were to continue .......