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Director in two Limited companies query

A director in a limited company wishes to set up a second and use it for SIPP contributions only

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Hi

I was hoping for some advice on the following situation.

A director of a limited company is on PAYE and receives their income through said limited company. They receive no dividends and for arguments sake a £100,000 salary per annum. There are multiple directors in this limited company. This current arrangement cannot be changed.

The above director wishes to set up a new limited company whereby they would be the sole director. Given the salary above and inability to change this, they would like to use this new limited company as a means of maximising contributions to their SIPP. The intention would be for the sole director to be zero salaried, no PAYE registration and instead contribute the entirety of the limited companies earnings to their SIPP as a direct employer contribution. The overall contribution level would not exceed their annual allowance. Ideally if for example they earnt £5000 in one year, they would contribute the entire amount or as much as allowed. There would be no requirement for any form of expenses or reimbursements. Ideally the director wishes for the second limited company for which they are the sole director to have no impact on their current tax arrangements, to not duplicate or cause complexity with multiple income streams and instead operate currently as a means of contributing to the SIPP. Should circumstances change in the future, they would like the ability to go about PAYE registration and potentially utilising this limited company as an income stream.

Is this feasible? And if so, what impact would it have on the directors Self Assessment (in terms of declaring employment in one or two limited companies for example) or for their current employer? Are they also allowed to effectively run the second Limited company with 0 profit and instead put all income into the SIPP as a contribution (obviously ensuring it doesn't exceed the allowances).

Edit: For clarification, there is no restriction on the director setting up a second limited company.

Replies (36)

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By OldParkAcct
04th Feb 2021 20:21

The main problem is whether his existing employer will let him set up a separate company.

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Replying to OldParkAcct:
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By user21387421
04th Feb 2021 20:23

They will, apologies for not covering that in the original post.

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By Paul Crowley
04th Feb 2021 20:29

Anon
Not interested in wasting my time replying

Whoops
Just wasted my time

Why do you think the site warned you not to post Anon?

EDIT just wasted more time adding ? to make clear that it was an actual question not a comment.

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Replying to Paul Crowley:
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By user21387421
04th Feb 2021 20:34

Thanks for your comments Paul - I am new to the site and made an error.

I have amended this now.

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Maytuna
By DJKL
04th Feb 2021 20:35

How does company 2 get the £100k per annum?

Does company 1 pay it to company 2, if so for what, what service does company 2 provide to company 1?

Is the payment of £100k by company 1 to company 2 W & E for the purpose of company 1's trade?

If paid for the services of Mr X, director of both, do we have any personal service company issues here?

Who came up with this cunning plan?

Why can director x not get company A to pay direct pension contribution and reduce his salary (Though £100k will not really be a good idea, try say £40k)?

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Replying to DJKL:
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By user21387421
04th Feb 2021 20:51

Company 1 and 2 are not connected in any way. I think this maybe negates some of the follow up questions - they will not trade or overlap with one another outside of having the same shared director in both. The £100k salary was to reinforce the fact that the director has no need or desire to use Company 2 for income, although that is an option should legally nothing else be allowed - it seemed to merely increase their currently high tax burden.

Company 2 is a separate business entirely. I'm open to suggestions around how the director should utilise it - but without the need for a salary and a SIPP being required due to personal circumstances that would appear to make sense. The alternatives I believe would just leave the money in the Ltd company - which is an option but I'd be interested why that's preferable to a SIPP contribution.

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Replying to DJKL:
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By Paul Crowley
04th Feb 2021 20:48

Not much to add
Assumed director is not a shareholder and completely powerless according to question set
Pensions are related to income

An interesting case on BADR/Entrepreneurs' relief re no employment contract in Taxation
P Kennedy TC7987
Not relevant if not a shareholder
Not relevant if not a shareholder

What would be co 2 Income?

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Replying to Paul Crowley:
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By user21387421
04th Feb 2021 20:50

Company 2's income would not exceed £20,000 per annum.

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By Paul Crowley
04th Feb 2021 20:53

Cannot understand co 2

Company 1 pays a salary
Not able to change this

Why is 2 paying a pension?
Director needs to pay pension as a person to get tax relief
Co 2 has no income and no trade? Therefore no tax relief

Am I being daft?
Am I losing the plot?

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Replying to Paul Crowley:
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By user21387421
04th Feb 2021 20:59

Company 2 would earn income by offering consultation services rendered by the sole director. As I understand it a director is not required to take a salary. The question is, can the income in the limited company then be used to contribute to a SIPP for the sole director should they be zero salaried.

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Replying to user21387421:
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By Paul Crowley
04th Feb 2021 21:25

Still cannot follow what this is about
If you are asking

I have a company with £20,000 income. can it spend it all on a company pension?
Perhaps you might get an appropriate reply

But my reply would still be ask an IFA

Better to pay a pension by person to get 40% tax relief, not just a poxy 19% in company 2

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Replying to Paul Crowley:
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By user21387421
04th Feb 2021 23:02

Appreciate you sticking with this, obviously I’m not communicating clearly what both the potential situation is and my questions. You are correct, my primary question is this:

I have a company with £20,000 income. Can I contribute it as a gross employer contribution to a SIPP for the sole director who is on zero salary ?

I’m not sure I follow your logic on “Better to pay a pension by person to get 40% tax relief, not just a poxy 19% in company 2”. Hopefully you can explain that to me.

I’m suggesting a gross contribution to a SIPP. Doesn’t that negate the 40% personal saving as it’s just a case of either paying tax on net earnings via paye and claiming it back as you suggest or paying no tax before on gross? And if they went for PAYE regardless they’d incur more costs administering that alongside NI?

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Replying to user21387421:
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By lionofludesch
05th Feb 2021 07:12

user21387421 wrote:

I have a company with £20,000 income. Can I contribute it as a gross employer contribution to a SIPP for the sole director who is on zero salary ?

I vote yes.

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Replying to lionofludesch:
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By lionofludesch
05th Feb 2021 08:32

lionofludesch wrote:

user21387421 wrote:

I have a company with £20,000 income. Can I contribute it as a gross employer contribution to a SIPP for the sole director who is on zero salary ?

I vote yes.

Mind you, when I said "yes", it was before I noticed the confusing reference to "I" in there. No, it has to be the company.

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Replying to lionofludesch:
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By user21387421
05th Feb 2021 08:42

Of course - please ignore the first tense. I was trying to build on the previous comment and lost accuracy. This is more appropriate and accurate:

Can a company with £20,000 income, contribute it as a gross employer contribution to a SIPP for the sole director who is on zero salary ?

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Replying to Paul Crowley:
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By user21387421
04th Feb 2021 23:03

Please ignore this. The previous reply was duplicated.

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Replying to Paul Crowley:
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By lionofludesch
05th Feb 2021 07:14

Paul Crowley wrote:

Better to pay a pension by person to get 40% tax relief, not just a poxy 19% in company 2

Yeah, but then there's less money in the director's pocket.

It's not all about tax relief.

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Replying to user21387421:
Maytuna
By DJKL
04th Feb 2021 21:52

To whom does he offer these services?

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Replying to DJKL:
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By Paul Crowley
04th Feb 2021 22:05

And if the answer is to co 1, and then take only 80,000 as wages then clearly the arrangement is not in any way fixed.

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Replying to DJKL:
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By user21387421
04th Feb 2021 22:34

A range of limited companies operating in the UK, most likely 4-5 per annum. There is no overlap of services offered between company 1 and 2. Company 1 will never invoice company 2 and vice versa.

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Replying to user21387421:
Maytuna
By DJKL
05th Feb 2021 00:03

You get a better outcome with a salary sacrifice in 1 which then pays into a pension scheme , provided taxable earnings are not crossing thresholds resulting in either clawed back personal allowance or moving into a new tax band, £98k in oldco with 2K persion then readily allows dividends of £2,000 to be paid by company 2 if it does make profits with only corp tax at 19% on its profits and no tax on the dividends (presuming div nil rate allowance not otherwise being used)

Why is Co 1 not paying any pension contributions, surely AE rights apply?

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Replying to DJKL:
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By user21387421
05th Feb 2021 07:41

This makes sense, thanks for taking the time to reply.

Company 1 contributes the minimum allowance to a pension fund. I had not considered the director flipping the use of company 2 to be dividend and top up income with company 1 being used to salary sacrifice for pension. The main reason for this not being considered was due to the stability of company 1 offering a consistent income stream. Company 2 would be a new venture with variation in what’s billed annually, for the director this doesn’t provide enough certainty around income to probably facilitate what you’re suggesting initially. This is the reason the pension contribution was chosen as it was viewed as anything being a bonus above and beyond their current minimum contribution through Company 1, that and also the ability to manage the sipp them self. The current scheme in place at co 1 isn’t ideal in both provider choice and investment choice. It will eventually be moved when employment changes.

Thanks for the reply - lots to think about in there. Hopefully some of the personal circumstances above explain the potential choice of usage for co 1 and 2.

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By Wanderer
05th Feb 2021 00:27

You may not have appreciated the subtlety in DJKL's 04th Feb 2021 20:35 response above.

Have you considered the maximum annual pension contributions that can be paid with tapering? £4k may be the maximum contribution, above which there is a further tax charge.

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Replying to Wanderer:
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By user21387421
05th Feb 2021 07:44

Thanks - the intent would be for the director to ensure they remain under the threshold of 40k. As I mentioned above their current employment contributes 8% this is acting as a top up to the maximum, with any excess income that would go above that being left in co2 as profit and simply held as cash in the bank. This is expected to be minimal if any at all due to the circumstances.

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Replying to user21387421:
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By Wanderer
05th Feb 2021 07:51

user21387421 wrote:

Thanks - the intent would be for the director to ensure they remain under the threshold of 40k.

Maximum might not be £40k though. Maximum might be £4k. Be careful about using the word threshold.
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Replying to Wanderer:
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By user21387421
05th Feb 2021 07:55

Understood, it is my understanding that from the income received in co1 they would not exceed the net threshold of 200k. This is unlikely to change and the intent is that this would be monitored and any contributions made by co2 reflected accordingly.

Net 200k figure is from here, please let me know if I’ve understood this incorrectly: https://www.gov.uk/government/publications/pensions-tax-changes-to-incom...

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Replying to user21387421:
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By Wanderer
05th Feb 2021 08:00

It's not just the income from company 1. It's the individual's total income, from all sources.

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Replying to Wanderer:
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By user21387421
05th Feb 2021 08:06

I can confirm this would not exceed the threshold.

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By Tax Dragon
05th Feb 2021 06:38

.New user
.Live dog

.Question: what's the point of Co2? (By which I mean, is its raison d'être commercial or tax? Is consulting as an individual possible?)

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Replying to Tax Dragon:
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By user21387421
05th Feb 2021 07:48

Consulting as an individual is a possibility. I’m assuming you’re considering then using a SIPP contribution for a sole trader to effectively achieve the same thing? This has been considered and remains a possibility.

The limited company was preferred due to the legal protection it offers the director, future potential for use as a primary income stream, flexibility should earnings breach the pension threshold and can be left in as income for example, and a preference with potential clients / for appearances sake e.g. to work with a Ltd not individual.

Hope that answers your question. If the setup with co2 isn’t feasible due to zero salary and gross sipp contribution I suspect this might be the next best route.

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Replying to user21387421:
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By Tax Dragon
05th Feb 2021 12:21

user21387421 wrote:

I’m assuming you’re considering then using a SIPP contribution for a sole trader to effectively achieve the same thing?

Yes. On the numbers as given, the advantage of using a company isn't really a tax one (and £20k is normally quite a low t/o to be considering a company), so I was wondering about the real reasons. Thanks for enlightening me.

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Replying to Tax Dragon:
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By lionofludesch
05th Feb 2021 08:24

Tax Dragon wrote:

.Question: what's the point of Co2? (

Puts fires out ? Helps plants to breathe ?

Bit off topic .....

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Replying to lionofludesch:
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By paulwakefield1
05th Feb 2021 08:39

Global warming......

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By fawltybasil2575
05th Feb 2021 11:20

@ user21 . . (OP).

In response to your 7.48 post today, and specifically the closing paragraph, you again raise the point re whether it is in order for a payment to be made, by your company, into a SIPP (the context being, as you have stated in previous posts, that you are not proposing to take any salary from the company).

The fact that no salary payments will be made to you, by your company, has absolutely no impact upon the Corporation Tax position of the company. It is entirely in order for the shareholders to determine the Remuneration paid to its directors, AND how that remuneration “package” is apportioned between Salary, Bonus, Benefits, Pension Policy etc. Theoretically, HMRC can challenge the TOTAL remuneration package, on grounds of its not being a commercially valid expense: but, to reaffirm, how that ”TOTAL” is apportioned is of no relevance.

In reality, HMRC would have negligible chance of success in seeking to disallow the total remuneration (in your case, simply the SIPP policy payment) since the director(s) is/are entitled to be suitably remunerated for their work. Make sure that the policy is in the name of the company, however.

Other more eminent members above have provided excellent “thinking outside the box” guidance, re your position as an employee of Company 1. In that regard, from brief reading of your posts, you are happy that no changes are appropriate re the terms of that employment (in terms of salary sacrifice in particular).

I would just however add to the comments above by Paul Crowley (his post yesterday at 21.25) and your asking his clarifying. The point which he was making, if he will forgive me (and if I have understood him correctly) was effectively whether, instead of paying £20,000 into a Company SIPP (you have previously indicated a Net Profit in the order of £20,000) you had considered the alternative of paying that £20,000 into a Pension Policy in your PERSONAL name, thereby obtaining 40% tax relief thereon, instead of paying that same £20,000 from your company, and thereby obtaining only 19% tax relief thereon. I appreciate that this may not be viable in terms of your “personal cash resources” (the point made by Lion today in his 7.14 post).

Basil.

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Replying to fawltybasil2575:
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By user21387421
05th Feb 2021 14:50

This is extremely helpful Basil. Many Thanks.

In relation to paragraph 3: "Make sure that the policy is in the name of the company, however." The Ltd Co2 is intending to make a gross contribution to the sole directors SIPP directly - which is in their name. There isn't any intention to set up a company pension scheme unless this is more favourable to the gross SIPP contribution.

With your final paragraph - are you suggesting that the sole director for Co2 sets up a company pension policy/scheme, pays himself via PAYE £20k for example and dictates 100% of it be contributed to a company pension? Isn't that achieving the same outcome as a gross contribution to a SIPP. One either gets relief at source (the SIPP via a gross contribution from ltd co2 and saves PAYE admin + NI costs) or the other seeks relief afterwards at 40% but this would ultimately be a similar figure given the higher tax rate at 40% due to Co1 income anyway which won't change.

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Replying to user21387421:
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By fawltybasil2575
08th Feb 2021 23:39

@ user21 . . (OP).

Forgive me if my last post was unclear. I was not recommending the paying of remuneration of £20k by Company 2.

What I was recommending was that Company 2 pay the £20k into a Pension Policy in THE COMPANY’s name. Paying the £20k into your PERSONAL SIPP would NOT be regarded as a COMPANY expense (subject my caveat below) but your personal expense: the payment would be therefore debited to your Director’s Loan Account.

It is thus necessary to start a NEW pension policy, in the name of the company (again subject to the caveat below).

To explain the above-mentioned “caveat”. It would normally be possible to arrange for the existing SIPP to be transferred into your company’s name (before the £20k is paid, of course), in which case the £20k will become a valid company expense and thus effect a Corporation Tax saving of £3.8k.

Given that the existing SIPP is in your personal name, you may perhaps reconsider operating the new consultancy business as a sole proprietor, instead of through Company 2.

Basil.

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