Large director's pension contribution

Large director's pension contribution

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I have a trading co client which has built up fairly decent cash reserves. The owner/director is soon to retire and his kids will continue the business for him, in the same ltd co.

He would like to make a large one-off employer's contribution (gross) into his personal pension scheme before he retires, to get some money out of the company in a tax efficient manner. 

The company is profitable every year but this large donation will cause a large loss for the year. I have read on occasion that pension contributions are usually fine but HMRC can potentially challenge large donations as not being wholly & exclusively for the purposes of the trade.

Has anyone had any experience of HMRC challenging anything like this? Or heard of any cases?

It is pretty 'vanilla' in my opinion so I would think it is OK, but it is just the size of the donation that has made me question it.

Many thanks in advance!!

Replies (10)

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By Wanderer
30th Jan 2016 06:52
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By Carl London
11th Feb 2016 10:59

£100k

Thanks Wanderer (apologies for my slow reply)

Proposed payment is £100k, director is also making ongoing monthly pension contributions of around £1k and has a nominal salary.

His total remuneration package would work out around 50% higher than the director below him so hopefully this would be acceptable as a commercial amount to pay.

 

Any further thoughts / comments appreciated!

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Replying to Paul Crowley:
By Paul D Utherone
11th Feb 2016 14:43

Fine so when you said

Carl London wrote:

Proposed payment is £100k, director is also making ongoing monthly pension contributions of around £1k and has a nominal salary.

you actually meant that "the company is also making ongoing monthly pension contributions of around £1k" in which case ignore what I said though it might still be relevant for the purpose of reviewing any annual allowance charge, but on the face of it probably not an issue.
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Replying to Wilson Philips:
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By Carl London
11th Feb 2016 15:26

Sorry - reading my previous post it was definitely misleading on this point!

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paddle steamer
By DJKL
11th Feb 2016 11:15

Presume the other avenues to cash extraction have been examined and found wanting?

e.g.If he was prepared to sell shares and the shares were ER qualifying (the cash would not cause issues) children forming newco to buy existing company shares from him and creating sum due to him might work out cheaper re tax rate (and might also work longer term re IHT planning ) and would not tie funds into a pension scheme with marginal rate tax on extraction, excepting the  current 25% . (No idea what George's next play around with pensions will be, recent Times article suggests he may want to make further changes)

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By PCBACFV
11th Feb 2016 12:58

Annual Allowances

I assume you have the Director's personal tax position in hand.  In particularly are there sufficient unused annual allowances carried forward from previous years to permit a £100K employer contribution in the current tax year without triggering the excess tax charge (NB watch for the further restrictions applying after the 5th April 2016 already announced - let alone what is in prospect for the budget)?  This looks very tight if the Director has regularly been paying £1K per month into the pension scheme as there will be a maximum of £28K of the current year's allowance available to cover the payment.

If the payment is within the annual allowance limits then there would appear to be little risk of it being challenged as a not for the purpose of trade, despite the low salary. 

As this is an existing personal pension scheme - see also RPSM05400020 on eligibility to tax relief  by the Company.

Incidentally the Director also needs to consider the pension lifetime allowance - being reduced from £1.25M to £1M in April.

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By Carl London
11th Feb 2016 13:11

@DJKL client is happy making a pension contribution as it meet the immediate desired objective without much complication, but thanks for the suggestion.

@PCBACFV with carry-backs I think it would be OK, but this is a calculation I usually leave to the IFA. I will get him to confirm with the IFA though so thank you for your comments.

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By Paul D Utherone
11th Feb 2016 13:23

Presumably the salary is not that nominal

if the director has been paying £1k/mth personally. Unless he has other relevant earnings that would surely require relevant earnings of £15k to obtain relief?

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By Carl London
11th Feb 2016 13:34

The contributions are employer contributions rather than personal contributions- my understanding was that you didn't need to look at relevant earnings in that case (as advised previously by another IFA!)

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By SteveHa
11th Feb 2016 15:46

Every time I see the topic title, I assume it's a rather portly director's regular contributions.

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