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Can we accrue for Company Pension contributions?

Pension Contributions by Company; can they be accrued

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My client's year end was 31 January 2019 and at that time, he was unaware if he could make pension contributions from the company.

Now the accounts have been finalised, there was profit in the company to allow for the contributions to be made.  Is it possible to accrue for these in the 2019 accounts or can contributions only be recognised on a cash basis?

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By WhichTyler
28th Oct 2019 22:13

Was there an obligation to make the contribution at the b's date, or did it arise afterwards?

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Replying to WhichTyler:
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By cagasee
28th Oct 2019 22:32

No obligation as such, as what I didn't mention was that it's a two-director company.

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Psycho
By Wilson Philips
28th Oct 2019 22:52

Even if accounting rules allow/require you to accrue, no tax relief until the period in which they are paid. So no real benefit in doing so.

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Replying to Wilson Philips:
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By cagasee
28th Oct 2019 23:05

I'm really grateful for you clarifying that, thank you ever so much

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By penelope pitstop
29th Oct 2019 00:55

Think I can agree with Wilson Philips. Company pension contributions is one of those areas you have to be extremely careful about. Always make sure you know the tax rules here and abide by them meticulously.

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Replying to Wilson Philips:
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By johnt27
29th Oct 2019 10:35

No tax relief but there would be a deferred tax impact if the pension contributions are accrued.

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Replying to Wilson Philips:
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By sammerchant
30th Oct 2019 12:49

I had a case where the pension contribution was made in month 14, i.e. after the year-end. We extended the accounting period to 18 months. The tax relief was still in the later 6 months, but it did spread the profit over the 18 month period. Detailed tax computation showed this clearly, and passed muster.

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Psycho
By Wilson Philips
30th Oct 2019 13:22

Well, as it turned out, the contribution wasn't made after the "year" end, was it?

Interesting, though, that you say that the relief was given in the second 6-month period. It may be academic, but that is wrong - the deduction should simply have been reflected in computing the tax-adjusted profits for the entire 18-month period, which are then time-apportioned.

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Replying to Wilson Philips:
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By sammerchant
31st Oct 2019 15:36

Not quite. There are two distinct Accounting Periods, the first of 12 months, the second of 6. The profits before the pension contribution are apportioned 12:6. But the contribution may be set only against the profits of the 6 month period. To be absolutely sure, I consulted both HMRC and a tax specialist.

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By The Dullard
31st Oct 2019 15:42

Well, I'm happy to tell you that both HMRC and the tax "specialist" were both wrong.

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Psycho
By Wilson Philips
31st Oct 2019 16:25

Unless the size of the contribution were such that a straightforward time apportionment would not give a just and reasonable result. But that would be highly unusual.

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7om
By Tom 7000
30th Oct 2019 11:57

too late its on cash cleared … you cant even have it in the bank rec....

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By L Haldane
30th Oct 2019 12:10

It is my understanding that directors' bonuses can be accrued into the annual accounts and claimed as a tax deduction in the year of accrual as long as
the bonus is paid within 9 months of the year end date.

Is it then a condition of this tax allowance that such accrued bonuses must be paid by way of a 'payroll reportable' payment and cannot be paid by means of an additional employer's contribution to the directors' pension ?

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Replying to L Haldane:
Psycho
By Wilson Philips
30th Oct 2019 12:20

Don't get hung up on "bonus". The 9-month rule simply applies to remuneration and not specifically to bonus payments. There is specific statutory provision for pension contributions.

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Replying to Wilson Philips:
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By L Haldane
30th Oct 2019 13:37

Thank you.

I now see this is clearly spelled out in HMRC's Pensions Tax Manual at PTM043100

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By Kevinb69
30th Oct 2019 13:43

That's a very interesting point. I think it would be a case of looking at whether there was a genuine bonus or whether this was just a fudge to try and get tax relief.

If the bonus was a contractual (implied or express) condition and the decision to turn it into a pension contribution was one made after the year-end I cannot see the basis for disallowing the expense in the earlier period. At least I hope not as one of my clients has been doing this on and off for years, his bonus is included in his contract of employment so is a requirement to provide for and he makes the decision of how much of the bonus to take in cash and how much to put into his pension shortly before the due date.

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Replying to Kevinb69:
Psycho
By Wilson Philips
30th Oct 2019 14:16

It doesn't matter what you call it. A pension contribution is a pension contribution and statute says that you can get relief only in the period in which it is paid.

FA 2004 section 196(2)

Furthermore, 'remuneration' - for the purposes of the 9-month rule - is effectively defined as earnings, which of course do not include employer pension contributions.

Your client needs to be advised accordingly.

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Replying to Kevinb69:
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By Tax Dragon
05th Nov 2019 06:27

Kevinb69 wrote:

If the bonus was a contractual... and the decision to turn it into a pension contribution.... he makes the decision....

He makes the decision. What you may have here is a pension contribution by the employee out of his contractual cash bonus.

You need to think about the contractual obligations as the tax treatment will be very different depending on what these are. It seems to me entirely appropriate not to add back a contractual cash bonus that the employee pays into his pension; however if the obligation is to award "something" to such and such a value, then of course you provide for that value but you must add back any part of the something that is a pension contribution by the employer.

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By The Dullard
30th Oct 2019 12:14

If you extend the year-end to include a time when the pension contribution was paid (assuming it doesn't result in a period in excess of 18 months) you could get a proportion of the tax relief.

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Replying to The Dullard:
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By sammerchant
01st Nov 2019 15:59

Yes, that's why we did it. If the taxable profit were, say £180,000 for the 18 month period, and the pension payment in month 14 was £50,000. you would end up with taxable profits of £120,000 in the first 12 month period and just £10,000 in the second 6 month period. I confess I fail to see the point you are making.

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Psycho
By Wilson Philips
01st Nov 2019 16:31

The point that both he and I are making is that you, HMRC and the specialist tax adviser are all wrong. In the example above you would have taxable profits of £86,667 for the first 12-month period (ie effective tax relief of £33,333 of the pension payment) and taxable profits of £43,333 for the second 6 months. You deduct the pension contributions to arrive at the tax-adjusted profits for the 18 months and THEN time-apportion.

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By sammerchant
03rd Nov 2019 10:57

I should have been clearer: the taxable profit of £180,000 was after adding back the pension contribution.

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Psycho
By Wilson Philips
03rd Nov 2019 11:22

I understand that. But there is no need to add back, or make any other adjustment for, pension contributions that are paid by the end of the period of account. That is where you are going wrong.

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Replying to sammerchant:
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By The Dullard
04th Nov 2019 11:08

You have a massive misunderstanding. The fact that HMRC and some other lunatic share the misunderstanding does not prevent it being a misunderstanding.

I agree with Wilson that the total profits taxable of £130,000, that we all agree on, are split £86,667 to the 12-month period and £43,333 to the 6-month period, based on a proper interpretation of the law.

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Replying to The Dullard:
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By sammerchant
04th Nov 2019 12:02

I was led to believe that each period of account was to be regarded separately. Just as you'd add back the depn., entertainment etc, the pension payment had to be added back and then allocated to the actual period in which it was paid. I am surprised that the experts (HMRC and the consultant) got it so wrong.

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Replying to sammerchant:
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By The Dullard
04th Nov 2019 12:55

Yes, but you're confusing periods of account (CTA 2010, s 1119) with accounting periods (CTA 2009, s 9-10).

You calculate the profit or loss of the (18-month) period of accounts, and then apportion it between the two (12-month and 6-month) accounting periods (per CTA 2010, s 1172).

FA 2004, s 196(2) then says that pension contributions are to be allowed in the PERIOD OF ACCOUNTS (not accounting period) in which they are paid.

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Replying to The Dullard:
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By sammerchant
05th Nov 2019 12:31

Well done! Thanks again, that is explicit.

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Psycho
By Wilson Philips
04th Nov 2019 12:17

I am not surprised that HMRC got it wrong. I cannot comment on the aptitude of the so-called tax specialist. I am, though, surprised that a tax adviser doesn't understand the (important) distinction between (tax) accounting period and period of account.

You add back business entertaining, depreciation etc because it is not allowed for tax, end of. You add back pension contributions only if they're unpaid at the end of the period of account - otherwise, you need do nothing with them.

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By sammerchant
05th Nov 2019 12:32

Thanks again. I now understand the distinction!

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