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Employer Pension Contributions Are Not Limited To Annual Allowance

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As we all know, pension contributions* made on behalf of a company’s employees are a legitimate way to reduce the amount of Corporation Tax a company might pay. As long as they meet the W&E requirements, pension contributions are an allowable trading expense, and as such reduce the company’s profits by the amount of the contribution.

Traditional wisdom states that the contribution the company makes is limited by the employee’s annual allowance. For example: a business has had a good trading year and wants to make a pension contribution for its two directors. The total contribution is limited to £80,000 plus any unused allowance over the past three years. This is perfectly correct with the majority of pension schemes.

However, there is a little known but completely legitimate way for a Ltd Co to make a larger pension contribution than just the directors’ allowance into an occupational pension scheme; by using a SSAS (Small Self Administered Scheme).

SSASs were designed specifically for SMEs and within their legislative framework have a facility called the “general fund”. This is separate to the fund set up for each member, and its function is to take indirect contributions as well as funds for future administration costs.

As the name suggests, an indirect contribution is not specifically allocated to a member in the year of contribution, but will either be allocated in future years or used to fund the pension scheme’s administration expenses.

An important factor to bear in mind is that when funds are allocated from the general fund to a member’s personal fund (sometimes called their pot) this is where the individual’s annual allowance is applied.

Although in theory there is no limit to the number of times a company can make contributions to the general fund, the number of members, their lifetime allowance and the number of prospective new members creates a natural ceiling. The age of members must also be considered, as it is only possible to distribute funds from the general fund to the members fund at the rate of £40k per until the receiving member’s 75th year.

When it comes to how much tax relief an employer can claim in any given accounting period, HMRC’s guidelines limit the total contributions to £500k per year. Obviously, this would not apply to much larger employers whose obligations under Auto Enrollment (for example) could far exceed £500k per year. If the contribution exceeds £500k (up to a maximum of £2m) the relief must be spread over future years. For reference see https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm043400

Contributions can be either cash or in-specie (typically contributing a commercial property).

Cash in the general fund must be invested in the same way as in any other fund within a SSAS; it can be invested, used to purchase commercial property, or be loaned back to the sponsoring employer.

Sometimes when we introduce the use of the general fund, some advisers worry that it might be seen as tax avoidance. Happily, we can allay those fears. Closer scrutiny of the facts shows that this facility cannot be abused because:

• When the contribution has been made it is then subject to pension legislation
• Members cannot benefit from the funds until they are allocated to their own fund (pot)
• The movement of funds from the general fund to the members fund is limited by the members annual contribution allowance
• The withdrawal of funds from the pension by members is covered by drawdown legislation
• It is not possible to distribute the funds back to the sponsoring employer without breaching current pension legislation and incurring substantial tax charges

So, although there is an immediate Corporation Tax advantage to the sponsoring employer, more funds are being introduced to the pension scheme and can only be allocated and accessed in line with current pension legislation.

This unique facility of occupational schemes may not benefit every business. However, there are many circumstances where it might, such as:

• Directors who are planning their exit strategy and want to provide for future pension contributions
• Businesses who have a surplus of cash and want to provide contributions for the future
• Businesses who want to build their pension fund to purchase commercial property
• Businesses who want to build a fund to provide contributions to new members

More Information
If you would like to discuss this particular aspect of SSASs in greater depth please call us on 0845 862 2869 and ask to speak to one of our advisers, or email us at enquiries@ssasco.co.uk.

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One to One Presentation
We also offer one to one online presentations covering the many applications of SSASs including loan backs and commercial property purchase. If you are an intermediary or business owner that would like to understand more about SSASs and how they can benefit SMEs please email clare@ssasco.co.uk

*Providing the ‘Wholly and Exclusively for the purpose of trade’ (W&E) test is met.



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Get in touch with us today for guidance on how to setup your very own SSASco Pension Scheme

We are specialists in pensions for businesses, and provide our clients with the highest quality of advice, whatever their requirements. Our team of experts can give you guidance at every step along the way whilst you have your SSAS, from setting up the scheme to accessing your fund when you retire.

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We are specialists in pensions for businesses, and provide our clients with the highest quality of advice, whatever their requirements. Our team of experts can give you guidance at every step along the way whilst you have your SSAS, from setting up the scheme to accessing your fund when you retire.