Topping up a director’s personal pension with company profits

09 February 2022

Michael Lansdell offers pension guidance.

Michael Lansdell offers pension guidance.

If you’re a director and want to top up your personal pension funds with your company’s profits, what’s the deal with HMRC? Would a tax deduction be refused, or is there the possibility for good retirement planning?

A married couple owns 50 per cent of the shares in a company, in which they have equal roles. Each takes a salary, plus dividends. They want to pay remaining profit that has accumulated into their personal pension funds. If the company receives corporation tax (CT) relief for its employer pension contributions, could this be a tax efficient way to top up?

A director’s remuneration is tax deductible when it is ‘wholly and exclusively’ paid for the purpose of the business. So, no deduction for pension contributions if the payment has not been motivated by trade. When a shareholder isn’t a director, or employee, a contribution to their personal pension fund counts as a distribution, not CT-deductible expense, and is therefore treated in the same way as a dividend.

But there is an acceptance from HMRC, generally, that a payment of a pension contribution is a fair and legitimate way of paying a director-shareholder, and this will qualify for a tax deduction. If the contribution is large, though, HMRC might decide that it fails the “wholly and exclusively” test because of a non-business motive. So, some/all of the contribution might not be tax deductible after all.

Confused? Well, HMRC contradicts its own guidance somewhat in its Business Income Manual, which states, “Where the controlling director is also the person whose work generates the company’s income, then the level of the remuneration package is a commercial decision…” In other words, remuneration (including pension contributions) would meet the “wholly and exclusively” rule and therefore usually be tax deductible.

HMRC might challenge a tax deduction for a non-controlling director’s remuneration if it looks excessive for their role within the company. But when the company is paying contributions for a director-shareholder, funded out of company profits, and the payments are proportional to the director’s job, there are no reasonable grounds for HMRC to refuse a CT deduction. It’s really about being able to prove that the remuneration isn’t excessive, so as well as being a “controlling director”, the company should not be making a loss either.

At Figurit, we can give you tax advice that could reduce your bill while keeping you compliant. We can also put you in touch with a pensions’ advisor, if necessary.

For help with business or personal tax planning, call Figurit on 020 7376 933.