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Is it possible for me to make a personal loan to my own UK Ltd. and then have the UK Ltd. pay it back by depositing it in my pension?

I am an employee of the company and draw a minimal wage: around £7,000, and £40,000 in dividends. Obviously I can use my personal allowance but only up to my earnings level. My company can make a contribution to take the total to around £40,000 contribution, but I don't have enough money in the company to make the contribution, so I would like to introduce my own savings into it, making the most of tax relief.

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    Which country ? And why cannot you pay directly into a pension ? – DumbCoder Feb 8 '17 at 16:22
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    @DumbCoder I would expect the OP expects some tax advantages having the LLC give its proceeds as a pension contribution rather than a dividend distribution, but with out the country tag we can't give a good answer. – Nathan L Feb 8 '17 at 16:35
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    Can I up vote an edit? Good work Nathan L. – Pete B. Feb 8 '17 at 17:05
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    @PeteB. Most of the work was done by Michael C - Nathan did some nice finishing touches for sure. And to DumbCoder - I would say your review choice was incorrect for that edit (of Michael's). That was a very reasonable edit (even if it needed a couple of extra touches). – Joe Feb 8 '17 at 17:40
  • @NathanL In the UK, a limited company can pay £40,000 a year into the pension found of a director, and that amount will reduce the profits by £40,000 and therefore corporation tax by £8,000. Dividends are paid out of profits, so you paid 20% corporation tax already. – gnasher729 Feb 8 '17 at 20:28
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The benefit of paying into a pension is that the payment is effectively made from pre-tax money.

Either you pay from your own pocket and then you get income tax relief on the payment, i.e. your gross salary is reduced by the gross pension contribution and income tax is recalculated with the excess either refunded to you or put in your pension (the details are a bit more complicated depending on your marginal tax rate, but the end result is the same).

Or your company pays, and then you are never charged tax on the payment in the first place.

From the company's point of view, the two are roughly the same. Either it pays you who then pays into your pension, or it pays straight into your pension. Either way the money going out from the company is treated as a cost that is offset against the company's revenue, reducing the amount of corporation tax the company has to pay. There are some National Insurance advantages to paying directly into the pension; neither you nor the company gets relief on NI if the payment goes via you, but no NI is paid in the first place if it goes direct from the company.

[EDIT: your question is actually worded to suggest that you want to lend your company money from your own pocket, and then have that loan directly discharged by the company paying into your pension. That's no different to you just paying into your pension directly, and wouldn't have any better tax implications. For the rest of my answer, I assume that the idea is actually to lend your company money that it uses to make an immediate contribution to your pension (as part of your pay from that company), and then the company will repay the loan later by returning the money to you personally. Your pension and you are two separate entities legally.]

However, in your case, what you're proposing is that the company should effectively make a loss paying into your pension: it's going to end up with more costs than revenue. So, there won't be any immediate tax saving because there wasn't revenue to pay corporation tax on in the first place. You also won't save tax because the loan will be made from previously taxed income or whatever.

However, there will be a tax loss that can be carried forward and offset against future profits, so if you expect the company to make money in future to repay the loan, you might end up saving some corporation tax. You can also sometimes carry a tax loss back one year, so if your company had profits last year you could get some corporation tax back immediately.

The repayment of the loan itself won't be subject to income tax as it's not income.

So unless you can carry the loss back, you won't get any immediate tax relief by doing this, but it might give you a way to carry forward your annual allowance to future years, i.e. use it now and get the tax advantage later. However, the annual allowance can already be carried forward by up to three years, so this is only worthwhile if you expect that future revenue to repay the loan to arrive more than three years later. Also, this is only worthwhile if you'll continue to max out the annual allowance for paying into your pension in future years, otherwise you might as well just make the pension payment using that same revenue in future years.

However, even if this beneficial tax-wise, I'm not sure if it's actually allowed; this might be viewed as an artificial transaction to avoid tax, and that could lead to HMRC disallowing the future tax relief. You might need to ask HMRC or an accountant about that.

If you do make the loan, make sure it's clearly documented so you can show in future why the repayment shouldn't be treated as income.

  • WAWW, FANTASTIC ANSWER – George Feb 9 '17 at 15:48

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