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Pension contribution and corporation tax questions

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Recently I had to take an insider IR35 contract via an umbrella (handed in P45 already), so I am thinking of closing down my company in the near future and take the entrepreneurs relief. But I would like to use my company funds to make contributions to my pension before shutting down the company. I have had some pensions from my pervious permie roles years ago but never paid any contributions since. I understand that my company can pay into a pension 40k each year and carry forward the previous three tax years. The tricky thing is that in my current company accounting year (November 2019), my company has had no income due to me being out of contract and it doesn't look like going to have any income for the whole accounting year as I am now using an umbrella. Someone told me that I am likely to run into the following troubles:

1. Given my company has not got any income this year, it won't be allowed to pay any contributions from retained fund as pension contributions can only be from the current year's income.
Is this true?

2. If I pay 3 or 4 years contributions, it will cause a massive loss to the current accounting year, then it may trigger an inland revenue enquiry, particularly if I close down the company shortly after as the payment may be regarded as not wholly and exclusively for keeping the company trading, instead, it is effectively paying for the company to ceasing trading.
How true is this? If I delay the company closure, will that help to mitigate this risk?

3. If the above two were both false, will I be able to claim any past corporation tax rebates for the loss in the current year? My last year's account has not been submitted and corporation tax for the last year has not been paid yet.

Replies (12)

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By Duggimon
01st Apr 2020 14:08

1: No, that's not true
2: part 1: potentially true and HMRC may be correct to assert this is not a trading expense and so not allowable. part 2: No, that won't help.
3: Yes you could, but they are not true so it's a moot point.

I would suggest contacting an accountant for help in efficiently winding up your company, your delay in doing so thus far has already cost you some potential tax relief.

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By Tax Dragon
01st Apr 2020 14:28

I disagree on 3, as it appears the trade has ceased. However, my disagreement is also moot.

If these are profits to which IR35 applied (which point I could not discern from the question - so this comment may also be moot) then there may be better alternatives even if the answers to 1, 2 and 3 were all more favourable than they are.

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By ian2020
01st Apr 2020 23:58

I am not sure which IR35 issue you are referring to here. Do you mind elaborating?
what are the alternatives? I have been contracting for many years, and on average changed jobs every 2 to 3 years. The last contract was 3 years long, all the others were shorter. Apart from the last one, I don't consider I'm particular high on IR35 risk.

If I shut the company, then I will try to apply for entrepreneur relief, and if the company pays into a pension fund tax free (even though it may not get corporation tax rebate), then there will be less tax to pay when shutting the company as there will be less money left in the company after the pension contribution. Is this line of thinking flawed?

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By Tax Dragon
02nd Apr 2020 07:25

Even with that new information, I have no idea what your opening scene-setting sentence means. But maybe it's me.

Without understanding I feel that I should not attempt to comment further. I tend to agree with Duggimon and Matrix - what's the harm in taking some advice from someone with whom you can discuss facts and figures and who can show you some sensible options?

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By ian2020
02nd Apr 2020 13:19

I probably didn't explain the thing well. Here is a fuller context. In my originally post, IR35 has not got a significant role to play apart from that given it's an inside IR35 contract I'm taking on, I cannot use my ltd company anymore. The contract potentially runs over the next 12 months which means for the whole of my current company account year my company will have no income, and given the current government onslaught on the contractors and the (though delayed) rollout of IR35 in the private sector next year which makes it very hard to find an outside IR35 contract, I'm considering closing down my company. Hence the whole issue of how to extract assets efficiently.

My current accountant is not very helpful, the company took over my original accountant's company and not doing a great job. The person dealing with my account does not seem to be that knowledgeable and when I spoke to his supervisor, got a different answer from his. They are not very responsive either. Hence I am posting here to try to get some more information. Maybe it's time to change accountant, but given my company isn't trading actively, I wonder it's worthwhile to spend further money.

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By Tax Dragon
02nd Apr 2020 13:33

Oh. You mean you've got a job. That's not an "inside IR35 contract". Hence my confusion. (That and the reference to a P45.)

Of course it's worth spending a bit of money if it helps you save a larger bit of money. Matrix has already suggested one way that good, situation-specific (aka bespoke) advice might help you do just that.

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By ian2020
02nd Apr 2020 14:57

My current contract is actually 'inside IR35', and it potentially will last a year (if the current turmoil doesn't resulted in cutting it short). I don't want to become a pemie after 15 years of contracting. But given the current hostility of the government to contractors, most of the contracting jobs are put inside IR35, using an umbrella or agency's own PAYE schemes. In financial sector where I work, it's extremely hard to get an outside IR35 contract.
That's why I, like many other contractors, are considering whether keeping my company running is too expensive.

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By Tax Dragon
02nd Apr 2020 15:17

So you can't close it down. It (not you) has a contract to fulfil. That's good. It gives you time to take advice and plan properly.

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By Matrix
02nd Apr 2020 08:12

Ian - the pension contribution will not save tax since the company has ceased trading. Capital gains tax treatment (and ER) would be withdrawn if you set up another limited company within 2 years. Follow my advice, keep your options open and get bespoke advice.

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By Matrix
01st Apr 2020 15:14

Given the amounts involved I would contact an accountant.

I would not close the company if I were you as you may be able to get an outside IR35 contract in the next 12 months and the delayed off payroll rules may never happen.

There is no tax benefit for the company in making a pension contribution now as already mentioned, but you could extract the money and make it personally where the max contribution is your net relevant earnings.

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By ian2020
02nd Apr 2020 15:09

I am thinking of topping up my existing pension in a big way as I have neglected it for long time thinking I was able to use my retained profit in my company over the years to fund my retirement, on my original accountant's advice years ago. Now, it looks contracting means much more tax going forward with the IR35 changes to roll out next year, that's why I am exploring the pension option. As my contractor salary was so low: 12k for last year, the only way I can top it up with big amount seems to be using my company's fund without paying personal dividend tax of 332.5% (which will be the case if I extract money as dividend first). The (somewhat naive) thinking originally was that pension payment can 1) attract corporation tax relief; 2) avoid paying dividend tax for the amount going to the pension when I wind up the company. Looks like none of them are particularly helpful. I don't quite trust my current accountant now, will need to search for a good, knowledgeable one.

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By Matrix
02nd Apr 2020 16:30

If the company was still trading then you could have made the contribution but sounds as if it is too late now.

Has your accountant not advised about the tax treatment of the winding up? It is just you mention tax on dividends whereas I assume you would be looking for capital treatment (maybe under a MVL).

Accountants are pretty busy right now but I would get someone you can trust and knows about winding up companies/knows a liquidator if you really want to close it. Although, as already mentioned, I would see if the off payroll rules for private sector are shelved since the market could well change.

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