Paying a bonus into a company pension fund to take advantage of the proposed new drawdown rules is not a problem – providing the timing’s right.
Chancellor George Osborne’s proposals to open up the money locked in defined contribution pensions from April 15, 2015 is an attractive proposition for many retirement savers – especially directors and shareholders in small companies who have the flexibility to manipulate the way their earnings are paid.
Most directors and shareholders will decide how much bonus they can take when finalising the year-end accounts.
Providing the bonus is paid within nine months of the company’s accounting period, the company picks up a corporation tax discount.
For directors and shareholders who are approaching 55 years old or have passed the milestone, voting a bonus to be paid into a pension means 25% of the fund, including the bonus, is available for them to take tax-free.
Trick is in the timing
The trick is in the timing of the bonus.
Assuming the company has a March 31 year end in 2014 and a profit of £300,000, the corporation tax is £60,000 in January 2015.
If the directors agree to pay a bonus of £100,000 and the money is paid before January 31, 2015, the corporation tax bill is reduced by £20,000 (20% of £100,000) to £40,000.
Paying the money into a pension also negates an employer national insurance bill of more than £12,000.
The downside is the company’s corporation tax reduction is delayed until the following financial year.
One way to reduce this delay is to extend the company’s year-end by up to six months, but the accounting time and costs involved for a company with a significant turnover.
Simple steps
However, a little known accounting rule can sidestep the tax reduction delays and let the directors pay the bonus into their pensions.
The steps are quite simple:
- Draft the year-end accounts as normal and include the amount intended to pay as a bonus
- Pay the bonus into the pension within seven days of the year-end. This means the pension provider must receive the cleared funds within this timeframe.
This benefits from the rule that allows a company to extend an accounting period by up to seven days without seeking permission from Companies House.
The result is a lot less accounting work – and both the company and the directors’ benefit from any tax breaks sooner rather than later.
