A limited company has retained profits of £500,000 and paid £30,000 corporation tax annually for the past ten years including last year. The company director has a pension open but never used it apart from long time ago, so four years’ carry forward will be available. This trading year, profits are only £50,000. Can pension carry forward be used to contribute the £160,000 towards the pension from the retained profit? This will take the company into a trading loss for the year and then can the company claw back corporation tax paid last year?

Arthur Weller replies:
Firstly, the figure of £160,000 is correct, but it should be made clear that this consists of this year's allowance plus three years’ carry forward. The answer to your question is yes. Current year pension contributions, if they exceed current year profits, can create a loss that can be carried back against the profits of the previous year. There are rules for spreading forward special contributions (over two to four years) if the amounts of the contributions exceed certain limits. By the way, employers' contributions must be wholly and exclusively for the purposes of the trade - like all allowable business expenses. See HMRC’s Business Income manual at www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46000, in particular BIM46010 and BIM46030. See also HMRC’s Pensions Tax manual at www.gov.uk/hmrc-internal-manuals/pensions-taxmanual/ptm043100, PTM043200 and PTM043400.]