Pension payments

Anne H

Hi there

This is my 1st posting on the site so please excuse any hiccups along the way.

I became a MIP approx. 1 year ago.

My tax knowledge was not built up via the accountancy path but through working with the Inland Revenue for a number of years.

Whilst I gained a wide knowledge of sole traders/partnerships when with the Revenue, my knowledge of Directors/Companies is very " limited." This area within the Revenue was centralised.

Anyway, I hope someone out there could please help me.

My client is a Ltd company ( husband & wife only - both directors). They have personal pension plans and the pension payments are being paid from the company bank account. The payments are net of tax. HMR&C website says the company is merely collecting payments for the employees and the payments should not be reflected in the accounts. This I can understand. However the previous accountant has allowed pension deductions in the accounts which bear no relation to the amounts of payments being made.
Is there special treatment for directors?
When I prepared the accounts for the year ended 31/12/06, the pension payments were temporarily debited to the directors account until enquiries could be settled. The previous accountant was uncooperative. The accounts were never changed.
The accounts for the year ended 31/12/07 are now in the process of being prepared and the problem of the pension payments is still here.

Please advise.

Nilesh Mandvia

Are these payments deducted from Payroll?

Are pension paymenet deducted from payroll? Have you checked they are deducted after the tax and ni? If yes, then company merely collecting payments from empployees and paying to pension provider.

However if any contribution from company towards emplyees pension, i.e. employer's contribution, then this would be employement cost and it is deductable.

I just wondered if you limited knowledge on "limited company" would be offering accounting services to them?

However going back to your question, without looking at the record, it would be difficult to give you precise answer.

deanshepherd

Sounds like a confusion between your client and their pensions adviser.

It seems that their personal contributions are being paid from the company account - I would therefore post it through the DLA.

They probably need to advise their IFA that they have a limited company and wish to make contributions gross.

No big deal to correct moving forward. The tax effect is marginal.

Nilesh Mandvia

Pension

Anne H wrote: »

Hi there

However the previous accountant has allowed pension deductions in the accounts which bear no relation to the amounts of payments being made.
Is there special treatment for directors?

Reading your post again here is another possible reason.

It may be possible that the payments were made to Pension Provider would be as employer and employees contribution.

You would get basic tax relief on emplyees contribution.

Worth checking payroll, pension statement and bank account and try and reconcile see if that's make sense.

It may likely that previous accountant may have made mistake. As pension is very complicated area.

deanshepherd wrote: »

No big deal to correct moving forward. The tax effect is marginal.

Dean, it has tax effect of persons circumstances if they were from employees net pay.

Pension company would claim basic tax relief from HMRC. If an individual is a higher tax payer, he/she may have to claim remaining balance through their tax return.

If these payments were from employer and if they are treated wrongly, i.e. pension company were told that they are from emplyees, then pension provider would claim tax relief, even though these payments are not entitled such a tax relief.

So these pension payments needs to treated correctly.

I may have misunderstood your posting but I just mentioned for the completeness.

Kind Regards

deanshepherd

I am not saying it has no effect.

What I am saying is that, for most small husband and wife OMBs, there is only a slight tax disadvantage to paying pension contributions personally (20% basic rate tax at source) compared to paying via the company (21% corporation tax relief).

Obviously the situation needs to be sorted out but it should be an easy fix for the pensions advisor with no great tax disadvantage in the meantime.

Anne H

The pension payments did not go through the payroll.
The previous accountant also dealt with the payroll....which I am now managing. The salaries being paid are just above the threshhold limit. Their income is being topped up by dividend payments from to time throughout the year.
The directors describe the payments as net of tax. The Tax Returns show the payments grossed up.

I had contacted the pension adviser by phone who confirmed the information would be posted out ......never to be heard from again!

I'll phone him again. Will let you know the outcome.
Many thanks for your positve feedback.

Nilesh Mandvia

Anne

As payment did not go through, then they were/are from employers contribution. So these payments are not net of tax but they are from employers contribution, so they should not attrack basic tax relief.

As the payment are from employers are allowable expeneses. They are part of employement cost hence they have to go through the accounts and should be included in Directors Emoluments.

I am confused why they were grossed up in Tax return. (You need to provide further information) As the pension payments were not deducted from Payroll. If they were from employers but not from employees net pay, then I think pensions should not be in tax return.

It looks like from the information provided that pension tax relief also been claimed, which is wrong, as these payments did not attrack the tax relief.

I recommend to ask some one to have look at the accounts and get the "proper" advise as they are few issues involved, pension, pension tax relief, etc.

Nilesh

Dean

Nilesh Mandvia wrote: »

Anne

As payment did not go through, then they were/are from employers contribution. So these payments are not net of tax but they are from employers contribution, so they should not attrack basic tax relief.

As the payment are from employers are allowable expeneses. They are part of employement cost hence they have to go through the accounts and should be included in Directors Emoluments.

I am confused why they were grossed up in Tax return. (You need to provide further information) As the pension payments were not deducted from Payroll. If they were from employers but not from employees net pay, then I think pensions should not be in tax return.

It looks like from the information provided that pension tax relief also been claimed, which is wrong, as these payments did not attrack the tax relief.

I recommend to ask some one to have look at the accounts and get the "proper" advise as they are few issues involved, pension, pension tax relief, etc.

Nilesh

Nilesh, you're asuming the contract between the 'client' and the pension provider is in the name of the company. On the face of it, it is in the individual names and I tend to agree with Dean (welcome back by the way!) and the payments are posted through the DLA.

Regards

Dean

Nilesh Mandvia

Dean wrote: »

Nilesh, you're asuming the contract between the 'client' and the pension provider is in the name of the company. On the face of it, it is in the individual names and I tend to agree with Dean (welcome back by the way!) and the payments are posted through the DLA.
Dean

May be I misunderstood.

1. Pension contributions are paid out from the company.

2. They did not go through the payroll.

Then how they should have been treated? I would be interested to learn. If some one could explain.

Poodle

Hi Anne

I have experience here.

Firstly have a look at the policy document, this should tell you what type of policy it is, then have look at the annual statements that you should have received from the provider showing payments made, again these should tell you what the payments relate to. I presume that the premiums are being collected each month by direct debit? They could be either just the company contribution (gross) or just the director contribution(gross or net) or a mixture of both and that may be why you are having problems with your reconciliation with what the previous accountant did.

Ignore the broker if he is being unhelpful and go straight to the pension provider to get the information that you need and they must provide this i.e. a detailed break down of payments being colleted and the tax treatment of these premiums by them.

Once you know what you are dealing with, then you can work out how the payments should be processed through the accounts/payroll and make ny corections necessary.

Poodle

Poodle

Anne H wrote: »

When I prepared the accounts for the year ended 31/12/06, the pension payments were temporarily debited to the directors account until enquiries could be settled. The previous accountant was uncooperative. The accounts were never changed.

Oh and if these end up being company premiums then you will please your directors because they can be deducted as a business expense to reduce CT:001_smile:

Poodle