Getting extra help with your pension – from the tax man

Published on Friday 29 August 2008 20:53

THESE are difficult times and many people are struggling to find the cash to inject into their pension schemes. Fortunately for those who own their own businesses, the situation may not be as bleak as it seems, thanks to HM Revenue & Customs (HMRC).

1 Take the example of a married couple (or those in a civil partnership) where the husband owns a successful family company. He would like to make a maximum contribution of 235,000 into his pension fund in the current tax year. However, even though the company is successful, cash flow is very tight right now and there is no liquid cash available to make a contribution.

After taking advice, he could sell sufficient shares in the family company to his wife to generate the necessary cash. Because personal pension fund contributions are grossed up in the pension fund, he would only require to sell his wife 188,000 worth of shares in order to produce cash of 235,000 in the pension fund. His wife, of course, does not have 188,000 available, so she goes to the bank and borrows the money to buy the shares from her husband. Because the borrowings are for a qualifying purpose, purchasing shares in a private family company, the interest she will pay on the borrowings will qualify for income tax relief at the highest rate of her personal liability.

After selling the shares to his wife, the husband then makes the pension fund contribution of 188,000, which becomes 235,000 in the pension scheme. Assuming he is paying sufficient tax, he can then claim basic rate tax relief at 20 per cent on the grossed up payment, producing a tax relief for him of 47,000.

By doing this both the principal sum borrowed and the interest relative to it are tax relievable.

The icing on the cake is that there will be no capital gains tax (CGT) to pay on the sale to his wife as this will be covered by the inter-spouse CGT exemption.

If the business is not a limited company, but is either a sole trader or partnership, there is nothing to prevent the husband selling his wife an interest in the business along broadly similar lines.

2 Individuals can double-up their contributions in the first year of a new pension scheme, which can be particularly useful for someone approaching retirement who wants to maximise growth in the few years remaining of their time in work. Assuming they have sufficient earnings, it would be possible to put a total of 470,000 into the pension scheme in the first tax year of its existence, by taking advantage of what is known as a "pension input period".

During this period, only one tax year worth of contributions can be made. Pension input periods have to be a full year, but the very first period can be shorter than that. This means that, for example, a new self-invested personal pension could be created on the first of a month, with the first pension input period being set to finish at the end of the same month and with subsequent periods also finishing at the end of that month each year. The effect is to have a double contribution in the same tax year.

3Where you own your own company and if cash flow permits, you could consider voting yourself a bonus through the company accounts.

The company would then pay the bonus direct into your pension scheme and the bonus payment would not have to go through the PAYE system.

Crucially, no employers' or employees' National Insurance contributions would be payable and the company should qualify for corporation tax relief on the full amount of the payment.

• Ronnie Ludwig is a partner in the Saffery Champness private wealth group.