SMEs talking technically about planning for SMEs Q&A

Pension Matters

Challenge is the Accountant typically refers it to the IFA as they don't know!

This can sometimes be true, but can give potentially get a foot in the door with the accountant to discuss the tax efficiency of pensions.

I guess pensions for HNW will become less attractive to due to recent IHT impact on pensions!

That was one of the stated aims when the pensions and IHT consultation began, pensions will be back to planning for your retirement needs, not an intergenerational wealth transfer vehicle.

Can the business claim back corporation tax from retained earnings exceeding current year's profits -how would this work?

This can be done, we have full details on this in the Q&A here, it’s the second question in the employer contributions section.

If a company make large pension contribution and creates a loss, can company claim previous CT paid?

See the above answer.

Pension fund 1mil . reg employer pension and employer lump sum before the end of the tax year. the limit of £268k TFC, should continue in pension/ elsewhere?

It really depends on what the client will need in retirement. As stated earlier the pensions and IHT consultation will change how pensions have been viewed since pensions freedoms was introduced. The client should fund what they need in pensions then for the remainder other strategies may be needed. Les covered the theory in our Pensions, Death and Tax webinar

For Ltd co business owners, is it a no brainer to always go down the route of employer pension contribution rather than making an employee contribution?

From a tax efficiency point this would be the case. Subject to the answers above that mention the pensions and IHT issue.

Re my question above - this is assuming employer has made a pension contribution using retained earnings

If this is retained earnings and you cannot get corporation tax relief for funding a pension if will then depend on the client personal circumstances. If they can extract dividends at the basic rate they will only pay 8.75%. The effective rate if the employer places this in a pension (assuming 25% is tax free) is 15%. Therefore numerically this has no benefit. If the client is a higher rate taxpayer the dividends will be taxed at 33.75%, but the pension has an effective tax rate of 30%.

What impact will the proposed government changes to the salary exchange rules have on employees who use this method for funding?

Perhaps, but this is a rumour at the moment. If we see any legislation or consultations on the matter we’ll be all over it.

Isn't the 26.5% tax rate unfair on smaller companies which aren't micro-entities?

It doesn’t matter if the company is micro or not, the rates of corporation tax are driven by the profits of the business. To get from 19% to 25% you do have to have a higher tax rate to catch up to the 25% rate of tax at £250,000.

The 19% tax on the first £50,000 makes the effective rate in the marginal band less than 25% and stops there being a cliff edge jump at £50,000 from 19% to 25%.

Company Investing Matters

I have just read that the 20% test for BADR is no longer as clear cut due to recent court cases - should we defer to the accountant when it comes to this?

Absolutely. It’s the accountants role to advise on the BADR position.

A company ceases trading, submits non- trading accounts, can dividends be taken until balance sheet is exhausted over a number of years?

Yes. It’s a fairly common strategy for single owner businesses.

I thought Micro entity rules have changed to £1m turnover and £500k Bal sheet

You are correct. Unfortunately we missed this update.

Conditions to qualify as a micro-entity

For accounting periods that begin on or after 6 April 2025

A micro-entity must meet at least 2 of the following conditions:

• an annual turnover no more than £1 million
• a balance sheet total no more than £500,000
• no more than 10 employees on average

We have corrected the slide and added a correction note on the recording.

For family investment companies, would you invest capital in a bond or a general investment account?

Both are viable options. It will be an investment style led decision, rather than tax led decision. A smoothed investment fund is often used to help manage volatility and such a fund can only be obtained via onshore and offshore bonds for a company.

Please could you revisit the gross up calculation for the onshore bond please.

We cover the calculation in our Corporate Owned Bonds & OEICs article on our Tech Matters site. Please see the section titled “Example continued – identical investment but historic cost accounting”

Tax implications when assigning bond between companies, e.g. from holding company to trading company ? is it deemed disposal subject to CT? any stamp duties?

It will depend on the purpose. This should be discussed with the company accountant.

If a controlling director has a 1m+ in cash in the company bank account and retiring in 3 years - is a bond a viable option to extract this money?

If the idea is not to wind up the business immediately, the director may choose to invest the retained profit and then take withdrawals from the investment (e.g. a bond) to subsequently extract form the business via dividends.

Can non micro entity use 'available for sale' to show at historic cost and use 'tax deferral' under IAS39?

This would be a question to direct to the company accountant.

When is the deemed percentage requirements for oeics (interest or dividends) assessed?

This test must be satisfied by any OEIC fund in order to make an interest distribution. An OEIC fund satisfies the qualifying investments test if at all times throughout the distribution period the market value of its qualifying investments exceeds 60% of all its investments. It’s an ongoing test during the distribution period rather a one-time event.

If OEIC fund passes the 60% test it distributes interest which is taxable on the recipient company. No streaming occurs.

If OEIC fund doesn’t pass the 60% test, it pays dividends. But, under the streaming process, part of the distribution is treated as taxable interest by the recipient company and part as tax free dividend. The provider is required to inform the company of the relevant figures.

If the OEIC fund has qualifying investments which have a market value over 60% of the fund’s total assets, then the loan relationship rules apply. Therefore, a fund which is able to make interest distributions will always fall under the loan relationship rules. That means (non-trading) credits and debits will be taxed in accordance with GAAP.

For a micro company how is a cash OEIC taxed?

This is explained in section 17 of our Corporate Owned Bonds & OEICs article on our Tech Matters site.

Can you offset the gain / profit made on a OEIC held the LTD to make an employer pension contribution?

Possibly. The company accountant will be able to give guidance, however, broadly speaking;

The pension “cost” will be shown as a business expense (there are different ways of calculating cost as between DC and DB schemes). The employer gets a tax deduction for the corporation tax accounting period in which the contribution is paid. That deduction reduces taxable profits and could create (or even increase) a loss.

There are various ways in which tax relief can be obtained for that trading loss. The main ones are:

• Carry forward against profits of the same trade
• Carry back against profits of the previous 3 accounting periods*
• Set-off against other (i.e. non-trading) income or capital gains of the same accounting period
• Surrender to other companies in the same group (if the loss making company is part of the same group).

*Finance Act 2021 temporarily extended the period for which trading losses could be carried back against previous profits. This extension applied to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022 and to trading losses made by unincorporated businesses in tax years 2020 to 2021 and 2021 to 2022.

Trade loss carry back was be extended from the current one year entitlement to a period of 3 years, with losses being carried back against later years first.