Directors and Pensions
Discussion
Hi guys,
Just wanted to double check my understanding on a few points regarding directors and pension contributions.
1. There is no limit on the pension contribution an LTD can make to it’s directors (within reason) in a given year. The contribution made has to be commensurate with earrings/profits made by the company.
2. Directors making a contribution to a SIPP will only get a tax credit up to the value of their salary. Dividends are not classed as relevant earnings for tax credit on personal pension contributions. So if a directors salary is £8/9k p.a contributions made to a SIPP up to this level would benefit from tax credit, but any contributions over this amount won’t get any tax credit applied.
3. When making a large one off contribution from an LTD to a directors pension, apart from being noted in the accounts, is there anything else they needs to be done with this transaction from a compliance perspective?
I’m assuming the accountant will record the transaction in the accounts and get the corp tax relief, keep a pension statement for the director which reconciles with the company bank statements and that’s it?
Just wanted to double check my understanding on a few points regarding directors and pension contributions.
1. There is no limit on the pension contribution an LTD can make to it’s directors (within reason) in a given year. The contribution made has to be commensurate with earrings/profits made by the company.
2. Directors making a contribution to a SIPP will only get a tax credit up to the value of their salary. Dividends are not classed as relevant earnings for tax credit on personal pension contributions. So if a directors salary is £8/9k p.a contributions made to a SIPP up to this level would benefit from tax credit, but any contributions over this amount won’t get any tax credit applied.
3. When making a large one off contribution from an LTD to a directors pension, apart from being noted in the accounts, is there anything else they needs to be done with this transaction from a compliance perspective?
I’m assuming the accountant will record the transaction in the accounts and get the corp tax relief, keep a pension statement for the director which reconciles with the company bank statements and that’s it?
IANAA, but sounds mostly right. Bear in mind, Ltd (employer) contributions still count towards your annual allowance, and you will have to register the company as an employer with your SIPP provider for the employer contributions to be handled correctly (normally just a form to fill in).
Will endorse what deggles has just said.
on point 1 - the contribution has to meet the "wholly and exclusive rules" for the company to be able claim corporation tax relief i.e. to effectively treat it as a business expense. Also, the employer contribution ideally is within the annual allowance available to the employee, otherwise an AA charge is payable.....by the employee!
on point 1 - the contribution has to meet the "wholly and exclusive rules" for the company to be able claim corporation tax relief i.e. to effectively treat it as a business expense. Also, the employer contribution ideally is within the annual allowance available to the employee, otherwise an AA charge is payable.....by the employee!
msport123 said:
1. There is no limit on the pension contribution an LTD can make to it’s directors (within reason) in a given year. The contribution made has to be commensurate with earrings/profits made by the company.
lizardbrain said:
I thought tax relief wasn’t relevant if company is paying the divi direct to the sipp? I which case no relief is available so salary doesn’t matter?
Regardless if your company or you personally are paying into the pension, the tax relief available is only up to 100% of annual earnings, with a maximum limit of 40k: https://www.gov.uk/tax-on-your-private-pension/pen...
https://www.gov.uk/tax-on-your-private-pension/ann...
Your company dumping 40k into SIPP also necessitates you having 40k of earnings.
For personal contributions you can only contribute up to 100% of relevant earnings and still receive tax relief. For most people that means 100% of salary. It excludes dividends.
There's no relief at source on third party/employer contributions so the limit of relevant earnings doesn't apply.
In both cases, there's an annual allowance of £40k. That could be from personal contributions, employer contributions or a mixture of both.
A personal contribution of £32k net would be grossed up to the £40k allowance with tax relief. You need to have £40k of relevant earnings to be able to make a contribution like that, so if you only have earnings of £20k gross you're limited to a max tax relievable contribution of £16k.
An employer could contribute £40k to a pension for an employee with zero relevant earnings. This route works for directors on small salaries plus dividends.
If the £40k allowance is breached, you can carry back unused allowances for up to three previous tax years starting with the oldest first. In theory you can do a max contribution of £160k in one go. If this is done as a personal contribution you need to have £160k of earnings to be able to do this though. Final proviso is that you must've been an active member of a pension scheme for the previous three years to utilise the carry forward.
All that said, you can in theory contribute whatever you like to a pension but will only get tax relief subject to the limits above.
There's no relief at source on third party/employer contributions so the limit of relevant earnings doesn't apply.
In both cases, there's an annual allowance of £40k. That could be from personal contributions, employer contributions or a mixture of both.
A personal contribution of £32k net would be grossed up to the £40k allowance with tax relief. You need to have £40k of relevant earnings to be able to make a contribution like that, so if you only have earnings of £20k gross you're limited to a max tax relievable contribution of £16k.
An employer could contribute £40k to a pension for an employee with zero relevant earnings. This route works for directors on small salaries plus dividends.
If the £40k allowance is breached, you can carry back unused allowances for up to three previous tax years starting with the oldest first. In theory you can do a max contribution of £160k in one go. If this is done as a personal contribution you need to have £160k of earnings to be able to do this though. Final proviso is that you must've been an active member of a pension scheme for the previous three years to utilise the carry forward.
All that said, you can in theory contribute whatever you like to a pension but will only get tax relief subject to the limits above.
Olivera said:
Regardless if your company or you personally are paying into the pension, the tax relief available is only up to 100% of annual earnings, with a maximum limit of 40k:
Your company dumping 40k into SIPP also necessitates you having 40k of earnings.
As noted above, that's wrong I'm afraid. Annual earnings are not relevant for company contributions.Your company dumping 40k into SIPP also necessitates you having 40k of earnings.
MaxFromage said:
As noted above, that's wrong I'm afraid. Annual earnings are not relevant for company contributions.
Thanks - I stand corrected.I'm curious why the HMRC links above don't mention this, and the first page of the first line unambiguously states: "You can get tax relief on private pension contributions worth up to 100% of your annual earnings."
Olivera said:
Thanks - I stand corrected.
I'm curious why the HMRC links above don't mention this, and the first page of the first line unambiguously states: "You can get tax relief on private pension contributions worth up to 100% of your annual earnings."
Private contributions are made by the individual out of post tax earnings. Paying directly into sipp from company funds is a not a private contribution so described on a different page I guessI'm curious why the HMRC links above don't mention this, and the first page of the first line unambiguously states: "You can get tax relief on private pension contributions worth up to 100% of your annual earnings."
samdy said:
For personal contributions you can only contribute up to 100% of relevant earnings and still receive tax relief. For most people that means 100% of salary. It excludes dividends.
There's no relief at source on third party/employer contributions so the limit of relevant earnings doesn't apply.
In both cases, there's an annual allowance of £40k. That could be from personal contributions, employer contributions or a mixture of both.
A personal contribution of £32k net would be grossed up to the £40k allowance with tax relief. You need to have £40k of relevant earnings to be able to make a contribution like that, so if you only have earnings of £20k gross you're limited to a max tax relievable contribution of £16k.
An employer could contribute £40k to a pension for an employee with zero relevant earnings. This route works for directors on small salaries plus dividends.
If the £40k allowance is breached, you can carry back unused allowances for up to three previous tax years starting with the oldest first. In theory you can do a max contribution of £160k in one go. If this is done as a personal contribution you need to have £160k of earnings to be able to do this though. Final proviso is that you must've been an active member of a pension scheme for the previous three years to utilise the carry forward.
All that said, you can in theory contribute whatever you like to a pension but will only get tax relief subject to the limits above.
This explains it perfectly - thanksThere's no relief at source on third party/employer contributions so the limit of relevant earnings doesn't apply.
In both cases, there's an annual allowance of £40k. That could be from personal contributions, employer contributions or a mixture of both.
A personal contribution of £32k net would be grossed up to the £40k allowance with tax relief. You need to have £40k of relevant earnings to be able to make a contribution like that, so if you only have earnings of £20k gross you're limited to a max tax relievable contribution of £16k.
An employer could contribute £40k to a pension for an employee with zero relevant earnings. This route works for directors on small salaries plus dividends.
If the £40k allowance is breached, you can carry back unused allowances for up to three previous tax years starting with the oldest first. In theory you can do a max contribution of £160k in one go. If this is done as a personal contribution you need to have £160k of earnings to be able to do this though. Final proviso is that you must've been an active member of a pension scheme for the previous three years to utilise the carry forward.
All that said, you can in theory contribute whatever you like to a pension but will only get tax relief subject to the limits above.
samdy] said:
An employer could contribute £40k to a pension for an employee with zero relevant earnings. This route works for directors on small salaries plus dividends.
This is basically me. LTD will be making the pension payment so relevant earnings don't come into it, but annual allowances do as pointed out. I'll be using the carry forward rule to utilise the unused allowance in previous tax years. I've been enrolled in pension before then so should qualify. Edited by msport123 on Thursday 10th February 10:38
samdy said:
Yes, if you've got any kind of defined contribution/money purchase pension then you'll be classed as being an active member of a pension scheme and can carry forward.
it's the govt. NEST scheme so I believe that classifies as a defined contribution scheme. Thanks for your input :-)Gassing Station | Finance | Top of Page | What's New | My Stuff