Reducing Corporation Tax liability?

[SteerKarma]

Our small limited company is in the fortunate position of probably having over £20K of net profit by the time our year end comes round in May.
The company pays £100 each a month into our personal pension each so £1200 per annum (I think this counts as an employee benefit?)
Can we take a lump sum out of the business and pay it into our personal pensions before year end and thereby reduce our corporation tax liability?

[Taxhelpinghand]

Not an employee benefit to the extent it goes on a P11D, but would be considered to be part of your overall remuneration package.

For a pension payment to be a viable deduction for corporation tax, it must be in line with what you would pay a third party unconnected employee. (The whole remuneration package)

If you’re paying the lump sump directly to the pension in line with the above, this will be deductible for corporation tax.

If you withdraw it to yourself, it would go to your DLA and would potentially need to be declared as a dividend if you don’t have sufficient credit in there to cover it.

[SteerKarma]

@Taxhelpinghand
Thanks for your answer.
There isn't a third party unconnected member of staff - it's just me, my partner and a part time worker, who's currently furloughed (hospitality business) so how would that work?

[Taxhelpinghand]

That’s not a problem at all. It would just be what you would pay somebody doing your job in that situation.

HMRC guidance is useful in this respect:

www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46035

I’m confident that the level of contribution you’re referring to (assumed £10k each based on £20k) would likely be fine, however you just need to be confident that you can satisfy the guidance above.

[smellyolddog]

I'm just exploring this with my accountants in the same position. They are talking about taking a PAYE payment, and pensions so I will pop back on and let you know what they recommend, I'm aiming to draw down 10k.

[SteerKarma]

Thanks again @Taxhelpinghand
We would probably only take around £5k each, and then use some of the remaining profit to pay back off some of the DLA for our 'silent partner' to reduce that account.

I'm not trained in accounting in any way so I find it tricky to work out what our net profit it is at any given time. I can look at my P&L and see one figure and think I've got a good idea of where we are towers the end of our financial year - but by the time the accountants have finished doing our year end and send back their figures it looks completely different!

Keep us posted @smellyolddog I find this whole area so perplexing- I'm neurotic about doing anything illegal and feeling the wrath of HMRC!

[Kazzyhoward]

Just be aware that you don't take the lump sum out and put it in your pension.

What you need to do is for the company to directly make an employers contribution into your pension.

It may sound a minor technical difference but it makes a big difference as to whether the company can claim CT relief on it and whether you'd have a personal tax liability (which you would if you personally drew it out and then paid it into a pension).

With anything to do with tax, the devil is in the detail.

[smellyolddog]

@Kazzyhoward great advice.