Employer contributions to pension

SarahLily

I look after a small Ltd Co. The owner/director has been advised by a pension consultant to set up a SIPP. She wants the company to pay into her SIPP. The pension advisor has implied that there may be limits on the value of contributions and that there may be NI implications but not being a tax expert is not willing to comment further!

My understanding is that, if the pension is an approved scheme, the contributions are an allowable expense so reduce the PCTCT. Is this correct? Is there any further tax relief?

Are there any limits (other than the 'A' day changes in 2006) or NI implications?

Thanks guys - looking forward to some helpful feedback.

peugeot

Hi,

I will try to help you using my (quite limited) knowledge of SIPPS.

Contributions made into a SIPP qualify for tax relief at your highest rate, so if you pay tax at 40% on part of your income, for each £1,000 contributed into a SIPP you would receive £400. There is no limit on the level of contributions you can make to a SIPP, but HMRC do limit the level that attracts tax relief.

Contributions to a SIPP by a company would be allowable deductions for corporation tax relief.

However, it is worth noting that where an employer makes a contribution on behalf of an employee, it may be more cost efficeint to pay all contributions to reduce any national insurance liability.

I hope that has been useful for you.

Best regards
Steve

Dean

Just to add to Steve's comments; there is a limit per tax year:-

Self-Invested Personal Pension

How much can I invest?

If you are employed or self-employed, you can put up to 100% of your earnings in any one tax year minus any other pension contributions in the same year. If you are retired or not earning money, you can invest up to £3,600 a year.

This is basically saying that anyone can invest a minimum of £3,600 per tax year or 100% 'relevant earnings' (look up relevant pension earnings). If you have more than one SIPP your 100% limit is apportioned.

Regards

Dean

Dean

Now to throw out a few ideas in regard to SIPPs which I bet the pension consultant didn't advise your client:-

If you open a SIPP and begin to contribute then this cash is completely tied up until your client reaches 50! He cannot 'release' that cash earlier, unless it is into another SIPP. So the question here is can your client support paying this in the future? Cashflow etc.

When you reach that tender age you can only physically get your hands on 25% of the fund. The remaining is to provide a income for your retirement. What if your client dies when he's 51? 75% of the fund lost. It won't get passed to your spouse or other beneficiaries!

Personally i'm not keep on these and I bet the consultant was after some commision for the charges to set-up the SIPP!

Yes, they do give CT relieve but that should not be the reason for going into a SIPP.

After all said and done, everyone has different 'needs' and you as the agent will be in the best position of all the facts.

Regards

Dean

Poodle

Hi

This is a weak area for me. Is any one able to recommend some useful CPD in the area of pensions.

Poodle

SarahLily

Thank you very much - that helps a lot.

To clarify, the point I was missing was the earnings limit. As the director is on a small monthly salary to avoid PAYE, NI, that will restrict how much the company can pay into her SIPP. As I understand it now, the annual dividend she plans to take will not be included in her pensionable earnings. Is that correct?

Interesting and slightly scarry point about not passing on 75% of the fund if she dies in early 50's!

Dean

Personal Pension Relief: 'Relevant earnings'

http://www.hmrc.gov.uk/manuals/REManual/RE284.htm

:001_smile:

Regards

Dean

Poodle

Hi all

Just to add in here; I have a client who incorporated from sole trader in Oct and from PAYE to self employment in June last year.

Looking at the link Dean do I read this correctly?

He earned approx £20k PAYE, £75K taxable profits scedule D then min sal in his own company since October, (just to get the PAYE back on the earlier period PAYE!!!)

So theoretically he could invest at least £95K into a SIPP personal pension plan this tax year and earn 100% tax relief?

And this payment could be made from profites earned by the company since October for CT relief and more efficiently than drawing a dividend?

Or is his company only allowed to pay in respect to his salary paid from his company?

And would he have to maye an employee contribution or can this all be an employer contribution?

Obviously subject to the availability of cash as we all know the more you earn the more you spend:laugh:

Poodle


PS Dean, I have the book on order:thumbup:

deanshepherd

A few points..

If your client is making contributions personally then he pays into his pension net of basic rate tax. Therefore, you can never physically get all your tax back, it goes into your pension pot. Higher rate tax relief will be achieved via self-assessment.

If your client is going to make personal contributions then he will either need to have spare cash around to do so or take additional money out of the company in order to make the contribution. If your client is a higher rate taxpayer and is going to be taking money out of the company then that is going to increase his taxable income for the year anyway.

There are no longer any carry back provisions so I am presuming the salary and profits are all current year.

Company contributions are paid gross and obtain corporation tax relief only. Theoretically there is no limit to the amount of contributions the company can make, within reason. Company contributions will have no impact on the individuals tax return and hence no higher rate relief will be obtained there.

We have only limited details about your client's situation but I would suggest it is likely that a personal contribution would be beneficial this year, preferably from savings, in order to gain higher rate tax relief. From next year it will probably be best to make employer contributions.

payrollpro

Hi everyone,

Thought I would add my comments to this being someone who has a personal pension being funded by my own company, much like the case in the original post.

My reasons for doing this were very basic, it allows me to draw money from the company which attracts CT relief and carries no benefit in kind implications, or has any other tax or nic implications for me. As far as I am concenred it is a useful way of distributing funds and avoids completely any future "income shifting" issues.

Dean is absolutely right when he points out that if the person who owns the pension is not making any contributions to it then they will not be entitled to any personal tax relief. If it is just the company making the payments then the company gets CT relief. If both sides make contributions then both receive relief on their respective contributions.

If the pension is contracted out of the state second pension scheme then there will still be contracted out rebates payable by HMC to the pensions provider.

A few issues about the arrangment though, Dean is also right about tying up money for such a long time, but thats what a pension is all about, the tax free growth rules and the exemption from CGT only apply because you cant get any of the money until you qualify for a pension from the fund and physically decide to buy your pension. It is correct that this is at 50 plus but take note that this limit is going to increase to 55 by about 2020 when the government makes its decision about what the state retirment age is going to be.

One other point, is that most personal pension arrangements have their adminstration charges capped at a very low figure, mine is currently 0.75% of the fund each year and will drop to 0.5% from next year, but only for stakeholder pension arrangements so there is something in what Dean has said about the advisers motives for pointing the client at a SIPP. The downside of such low administration rates is that whenever you get a problem it spirals out of control very quickly.

For larger companies these types of pension can be funded by the employer under a salary sacrifice scheme where the employee saves IT and NIC with the employer saving the secondary NIC and gets CT relief on the contributions. Its a great way to fund a pension because the employer can recycle their savings into additional contributions and is increasing in popularity.

Poodle

Thanks millions guys,

As soon as I read Deans relpy the grey matter clicked in and I realised:ohmy:

I have just seen my client and gone through this with him and like me he does not trust pensions (tax advantages or not).

He has decided to invest his surpus cash into property with a mortgage and then to go down the equity release route instead.

Poodle

deanshepherd

Poodle wrote: »

He has decided to invest his surplus cash into property with a mortgage and then to go down the equity release route instead.

Let's hope house prices don't crash then!

I assume you didn't advise him against going for a pension?!

:ohmy:

Poodle

I would not advise anyone in that way, I do realise that I am not qualified to do so and my PII does not cover that. I am upfront and open with my clients with that and they do appreciate the honesty.

I just told him of the options that I was aware of and their taxation impacts I also included the fact that he could discuss with an IFA or his bank and left him to make his own mind up.

However one thing that he is going to do is top up his Barclays ISA today as they are offering a special rate at the moment of an extra 1%.

He just did not want to tie his money up in a pension and I cannot blame him really.

Living in the SE in the present market he should be able to pick up a bargain and he would not be looking at the overinflated firsttime buyer market anyway.

Wish I had the same financial problems:001_smile:

Poodle

PS Sarah sorry to side track your posting

Dean

Poodle wrote: »

PS Dean, I have the book on order:thumbup:

:001_smile:

Sorry I couldn't reply sooner. It appears all bases have been covered.

Regards

Dean