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Limited Co - Pensions contributions and low salary ?

I'm not certain about this and would appreciate the benefit of community members wisdom.

One of my clients - a limited company - one shareholder / director is looking at some pension arrangements.

My understanding is, he can get tax relief on personal contributions up to amount of his relevant earnings £7 300 (max £50k) in his case because he also receives a dividend.

Otherwise his company makes a contribution for him, which can exceed the £7 300 stated above up to £50k as long as the work he does is commensurate with that level of pension payment.

But it would have to be a company pension scheme so will need the help of an IFA.

Grateful for feedback.

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15th Feb 2012 21:56

Doesn't have to be a company scheme

The company can make an employer contribution to an existing personal pension - no need to set up a company scheme.

You might be able to pay more than £50k in this year if payments in past years were below the allowable limits

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By law man
16th Feb 2012 10:24

Have a look at HMRC guide:

BIM46035 - Specific deductions: registered pension schemes: wholly & exclusively: controlling directors & shareholders

It says:

"One situation where all or part of a contribution may not have been paid wholly & exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer. In this situation, you should consider whether the amount of the overall remuneration package, not simply the amount of the pension contribution, was paid wholly and exclusively for the purposes of the employer’s trade."

I read this as meaning:

(1) The 'market value' of the services provided by the director to the company is (say) £7,300

(2) if in one year in addition you pay a single premium of £5,000 into one director's personal pension fund, then it may not be a deductible expense by the company. However, who is to judge whether a total remuneration of £12,300 is excessive?

(3) Query it is more likely to be non-deductible if this is for one director only, not a general pension policy for all directors.

(4) In contrast to (2), if - at the request and direction of the director - the company pays £7,300 pension contribution instead of salary, then it will be deductible.

These are basic thoughts only, not informed by experience. If anyone has any better knowledge, it would be welcome.

 

 

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By Albie
16th Feb 2012 17:50

Thank you for your feedback

Thank you Cloudcounter and Law man for your comments.

My thoughts were pretty much in line with you both, ie I'm aware that the contribution together with salary has to be in reasonable proportion to his contribution to the companys turnover and profit.

I'm much obliged to know that I'm in good company.

Thanks 

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23rd Feb 2012 13:37

Limited Co - Pensions contributions and low salary ?

I am an IFA and in the process of doing just that, single Director of Ltd company paying himself £6995.00 per year, taking dividends of £250,000 per year and normally paying £20,000 per year into pension.  He has a personal pension pot of £230,000 and will be transfering this to a SIPP in order to buy the building his Ltd company trades from.  The purchase will require and additional £100,000 in contributions and he has £144,000 of Carry forward and this years (£50,000) of unused allowances over the last 3 years.

My advice is to pay himself £50,000 through PAYE this year and request HMRC inspectors approval prior to making any large pension contribution. Hope this helps!

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By Albie
23rd Feb 2012 14:41

Excellent feedback, thank you.

Thank you Johna, excellent answer, it is a great help, particularly the advice to request approval before making any large sum contributions.

I'm also very interested in your comment regarding the pension buying the commercial property through a SIPP - this is something I have thought about as it is very tax efficient and its very interesting to hear that you are actually doing that.

Thank you again for excellent feedback

Albie

 

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By Albie
23rd Feb 2012 14:42

Posted reply as new comment in error. Duurrrr

Johna, just replied but accidentally posted new comment instead

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