Companies claim relief for pension payments when paid and not when accrued in the accounts. Without any adjustment for deferred tax where a company has unpaid items like pension contributions the impact is that the tax charge will be higher than the accounting profit and the difference is multiplied by the tax rate. If the payment is made in a subsequent year the tax charge will be lower than that year's profit multiplied by the tax rate. So to even out the profit for both years, a deferred tax asset is created which recognises the tax relief that is going to be obtained in the future. So assume a pension accrual for the year-end of £5k
Profit before tax..............................£100,000
Tax adjustment for pension accrual.....£5,000
PCTCT...........................................£105,000
Corporation tax at 26% = £27,300
Profit before tax of £100k multiplied by 26% = £26,000. The difference between this and the corporation tax in the tax comp of £27,300 represents a deferred tax asset of £1,300 which reflects the fact that relief will be available in future when the amounts are actually paid.
I'm an accounts junior (level 4 student) at a small practice so I never actually end up dealing with deferred tax myself (manager/partner sorts this out).
Just for my information:
Would the journal be:
DR Taxation (appropriation of profit): £26,000
DR Deferred Tax (balance sheet): £1,300
CR Corporation tax (balance sheet): £27,300
Then next year would the journal be:
DR: Taxation (appropriation of profit): £1,300
CR: Deferred tax (balance sheet): £1,300
Sorry for this ridiculously easy question; I hate deferred tax and pensions!!!!
Just out of interest; assuming a client is non-audit; would HMRC (or any other inspector) consider the accounts significantly wrong and expect me to re-submit if I had not posted deferred tax?
If you have written a book on deferred tax and pensions for dummies, please let me know.
Actually Steve I'd be interested in your reply to reader also regarding the entries. Also if you have written any books on defferred tax as well as I'm in a new practice job.
Thanks in advance
Baz
DR Taxation (appropriation of profit): £26,000
DR Deferred Tax (balance sheet): £1,300
CR Corporation tax (balance sheet): £27,300
Then next year would the journal be:
DR: Taxation (appropriation of profit): £1,300
CR: Deferred tax (balance sheet): £1,300
Hi
You would debit deferred tax asset with £1,300 and credit corporation tax charge tax of £1,300 when you recognise the deferred tax asset and then next year you would do the 2nd journal.
I have written a lot of articles on deferred tax which you can find on AccountingWEB - my books contain a section on deferred tax, but I have not written a full book on DT. My Dummies book (due out on 6 April next year) does contain a section on deferred tax, but not in the context of pensions. I've written the chapter now which has gone off for development and copy-editing so I can't include pensions, but there is a 'Dummies' guide to how deferred tax works (though IAS 12 rather than FRS 19). There is an article due on AccountingWEB shortly relating to pensions and I think I will include an element of deferred tax in there as well.
Barry
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Comments
Companies claim relief for pension payments when paid and not when accrued in the accounts. Without any adjustment for deferred tax where a company has unpaid items like pension contributions the impact is that the tax charge will be higher than the accounting profit and the difference is multiplied by the tax rate. If the payment is made in a subsequent year the tax charge will be lower than that year's profit multiplied by the tax rate. So to even out the profit for both years, a deferred tax asset is created which recognises the tax relief that is going to be obtained in the future. So assume a pension accrual for the year-end of £5k
Profit before tax..............................£100,000
Tax adjustment for pension accrual.....£5,000
PCTCT...........................................£105,000
Corporation tax at 26% = £27,300
Profit before tax of £100k multiplied by 26% = £26,000. The difference between this and the corporation tax in the tax comp of £27,300 represents a deferred tax asset of £1,300 which reflects the fact that relief will be available in future when the amounts are actually paid.
Hope that helps.
Regards
Steve
I'm an accounts junior (level 4 student) at a small practice so I never actually end up dealing with deferred tax myself (manager/partner sorts this out).
Just for my information:
Would the journal be:
DR Taxation (appropriation of profit): £26,000
DR Deferred Tax (balance sheet): £1,300
CR Corporation tax (balance sheet): £27,300
Then next year would the journal be:
DR: Taxation (appropriation of profit): £1,300
CR: Deferred tax (balance sheet): £1,300
Sorry for this ridiculously easy question; I hate deferred tax and pensions!!!!
Just out of interest; assuming a client is non-audit; would HMRC (or any other inspector) consider the accounts significantly wrong and expect me to re-submit if I had not posted deferred tax?
If you have written a book on deferred tax and pensions for dummies, please let me know.
Thanks in advance
Baz
Hi
You would debit deferred tax asset with £1,300 and credit corporation tax charge tax of £1,300 when you recognise the deferred tax asset and then next year you would do the 2nd journal.
I have written a lot of articles on deferred tax which you can find on AccountingWEB - my books contain a section on deferred tax, but I have not written a full book on DT. My Dummies book (due out on 6 April next year) does contain a section on deferred tax, but not in the context of pensions. I've written the chapter now which has gone off for development and copy-editing so I can't include pensions, but there is a 'Dummies' guide to how deferred tax works (though IAS 12 rather than FRS 19). There is an article due on AccountingWEB shortly relating to pensions and I think I will include an element of deferred tax in there as well.
Kind regards
Steve