October 29th, 2012 / Insight posted in

Minimise tax on pension payments

HW writes: After many years of investment, my company is starting to generate a cash surplus. I am now considering what to do with this. I have minimal pension provision, so I wonder what is the maximum I could put into a pension, as a lump sum or on a regular basis, to keep the company’s corporation tax bill down?

New rules for pensions came in on April 6, writes Jon Sutcliffe, partner at Kingston Smith LLP. If more than £50,000 is contributed to a pension, the excess is taxed at the individual’s marginal income-tax rate.

An individual who exceeds this annual allowance in a given tax year will not, however, have to pay tax if he or she has an unused allowance carried forward from the previous three years.

The annual allowance in the current year needs to be offset first. Only if it is insufficient can the carried forward amounts be used.

If more than one of the preceding three years has unutilised amounts, those of the earlier years are used before those of the later year. The carry forward provisions should be particularly beneficial for one-off payments, as it may make it possible to put in contributions of well over £50,000 without giving rise to an income-tax charge.

However, for the carry forward to apply, the individual must have been a member of a pension scheme in that year. Thus, a person who was a member of a scheme but made no contribution in the year can carry forward £50,000. A person who was not in a scheme cannot carry anything forward.

It should be noted that the £50,000 does not affect the corporation tax of the company. The company should obtain a tax deduction on the pension contribution even if the £50,000 limit is exceeded. However, the company can only obtain the tax deduction when the contribution is paid into the pension fund, not when it is accrued in the accounts of the company.