Payments to a registered pension scheme are a tax efficient method of extracting profit from a limited company, they are also qualifying deductions for IR35 and would mitigate tax liabilities resulting from a HMRC challenge.
HMRC’s guidance (BIM46035) indicates that director’s pension costs at a ‘commercial level’ will class as an allowable deduction – broadly this means that the overall remuneration package (salary, benefits in kind and pension) should be comparable to that which would be offered to an unconnected third party to perform the same work. Whilst employer contributions are not restricted to an individual’s relevant earnings, we advise avoiding putting the company into a trade loss position for the accounting period and consideration should be given to the annual and lifetime allowances.
Pension contributions made from the personal funds of the director and can be eligible to tax relief; basic rate relief is claimed by the pension fund itself, so if £80 is paid into a pension fund personally the fund will then be able to claim £20 from HMRC which will be allocated to the fund making it worth £100 overall. Higher rate tax relief is then given via self-assessment for those whose income exceeds this level, the mechanism by which this happens is to extend the higher rate threshold by the gross value of the contribution – saving a further 20% in tax. For personal contributions the maximum contribution (gross) that can be made is 100% of the taxpayers earned income (broadly, salary).
In both circumstances (company contributions or personal contributions) the maximum that can be contributed to a pension is £40,000 (gross), however unused allowances can be carried forward from previous years if a pension scheme was in place at that point.
We can put you in touch with a wealth management company to discuss retirement planning and other regulated financial products. Please speak to your accountant who can arrange an introduction to discuss your options.
Gorilla Accounting is a specialist accountancy firm, exclusively for Contractors and Freelancers operating through a Limited and Umbrella Company.If you would like more information,get in touchwith our New Business Team by calling 0330 024 0406 or email info@gorillaaccounting.com.
