Tax Forum :: Free Tax Advice

We are a small limited company looking to reduce Corporation tax - £39K tax paid last financial year.
This year we were thinking of reducing it by putting some profits into pensions.

What are the rules we should be aware of?
Does this need to be a company scheme or can it just be payment by the company into personal pensions?
If it has to be a company scheme does this need to be set up actually within the financial year or can it be done retrospectively? Our financial year is end of this month so we are possibly too late if so?

The contributions need to be made by the company and they can be paid to either a group personal pension scheme or an occupational scheme. As long as the contribution is made within the current trading year - ie must be debited from company account no later than last trading day of the companies financial year.

Personal contributions into a pension are restricted to 100% of their net relevant earnings, which cannot include any dividend payments but can include P11D benefits. However, if the Compnay/Employer contributes, then their payment is not measured against the individual members earnings, but this would need the satisfy the 'Wholly and exclusively' test as to whether it could be relievable against Corporation tax. Also if the Company/employer was to contribute over the members annual allowance, then there would be an annual allowance charge of 40%, and this would be borne by the member. Ouch.

From a tax efficient perspective, if company rewards directors by providing increase to income via a significant salary increase or one-off bonus payment, this being a trading expense will reduce corporation tax liability (check that from HMRC perspective, contribution can be deemed “wholly and exclusively for trade” and therefore the business can justify such a contribution). However, paying this by salary will increase Employee and Employer NI contributions.

If director elects to receive the “bonus” by way of pension contribution/salary sacrifice this will work to reduce both NI and Corporation tax liability, but to affect a salary sacrifice, there must be the salary in the first place. Make sure the reason for the bonus/increase in salary is noted in the company minutes to back up evidence as "wholly and exclusively for trade"

If the payments were made as pension contributions, there would be no NI to Pay, and therfore no NI to save, but so long as HMRC thought the payments satisfied their 'Wholly and exclusively' test, then the amount would be potentially relievable against Corporartion tax.

Hope this helps

Many thanks for the comprehensive reply.

We are a family business of 4 shareholding family members and 3 other employees. We paid £39K CT last financial year.

Since it's now so near the end of our financial year we are looking to pay a lump sum of 25K to each of 2 of the shareholders (both managers but not directors (but could be made directors if advisable) Both at present have salary of 35K+dividend of 10.5K so the 25K would be less than the salary. One of the 2 already has a personal pension which the company has been contributing £250.00 p/m for for several years. Other has no pension.

Can we just ask a provider to set up a group personal pension scheme and just pay in lump sums of 25K?

You say "If director elects to receive the “bonus” by way of pension contribution/salary sacrifice this will work to reduce both NI and Corporation tax liability, but to affect a salary sacrifice, there must be the salary in the first place. Make sure the reason for the bonus/increase in salary is noted in the company minutes to back up evidence as "wholly and exclusively for trade"

So it sounds like we should either award bonus of 25K or increase the salaries by 25K (or a combination?) but opt to take the increase by salary sacrifice? In the past we have given small bonuses only to other staff (<1K)
Can you give an example of a reason? eg becoming a director?

Miro2021

I thought I must respond to your points because you seem to be wandering off into the wilderness in search of getting a tax deduction.

Frankly any consideration being given to putting cash into a registered pension scheme at the moment should be dismissed immediately; there are far more beneficial ways of saving corporate tax eg. the use of an EFRBS.

An EFRBS is an employer financed retirement benefit scheme. It is not a registered pension scheme which means you are not hamstrung by HMRC's rules as to what you can do with the funds once they are in there.

We market a product which also allows donor companies to achieve a corporate tax deduction for contribtions to the EFRBS whilst allowing director/shareholders access to the funds by way of loans. Should the director wish to use the fund as an investment vehicle instead then that's fine too; investments can be made in most assets including residential property.

Currently because of low interest rates we do offer an onshore product as well as an offshore product which gives clients more flexibility and more control of their fund.

If you would like to discuss further please call us on 01732 897850 or visit www.taxation-advice.com

Kind regsrd,
John King CTA

Miro, this seems a little confused - I am not a occupational pension specialist but my understanding is that

while there is no personal taxation to pay in to an EFRBS you do still pay Corporation tax on the contributions.
It can also trigger a CGT charge on transfer of accumulated assets.
If you take a loan from the fund then it must be at commercial interest rates.
The cost of maintaining an EFRBS is pretty substantial in comparison to a pension (fees sometimes bear little or no relationship to the fund value)
Income generating investments within the trust are taxed at the trust rate of 40% unless a company is set up within the trust and owned by the trust to collect the income as profit and pay corporation tax on it.
As I said, I am by no means an expert on specialist pensions. Review your primary objective. The real issue in my mind however is the cost of running one of theses schemes in relation to the investment sum. Especially if the contributions are genuinely for retirement. Perhaps John wouldn't mind educating us a little further?

Thanks for the advice.

Objective is to genuinely start saving towards retirement (mid 30s with no pension though have some other assets) . Seems to make sense to pay out more of the company profits to us in the most tax efficient way. Don't really need more personal income at the moment so seems sensible to put in pension?

Pensions get bad press but at least I would understand how poorly my investment was faring!

Good Morning Miro
I think you need to get some impartial advice on all your options. If you want to get in touch to discuss in greater detail, please contact me by phone or email. 015395 31419 or email joanne@jmap.fslife.co.uk.

Miro/Joanne,

I must advise you that you are both a little misguided on what is possible in the tax arena using EFRBS.

For Miro it is my belief that the product is just what he is looking for; investing for his future in an unlimited pension plan the funds of which can be invested in whatever assets he likes.

At the same time, using one of our EFRBS, the pension plan can be structured so as to achieve a corporate tax deduction too! We have eminent tax counsel opinion to support this view which can be provide (for private use only) should you be interested.

Kind regards,
John