Backdating Pension Contributions -For 1 Director Only IS it Allowed

[iguy2008]

Hi

I regular see recommendations on the forums to back date directors pension contributions. I run a small limited company with my partner and we have 70/30 share split.

As she has an existing pension, I thought it would be a good idea to backdate her contributions upto the £40,000 per year allowed, for the last 3 years

I spoke to my financial advisor who said that their internal accountants that this must be done for both directors in proportion to the shareholdings and that HMRC are cracking down on this. However, they also said that if my accountant was ok with it then they would be also.

I however cannot backdate any contributions as I do not have an existing pension.

I have asked my accountant who generally agrees with my financial adviser but says he is not a a pension adviser so cant really comment.

Essentially, Im just trying to find out if I can backdate the contributions for the other director only (because she is the only one with an existing pension scheme). For the current year I could start a pension scheme for myself and pay contributions in the 70/30 proportions (but I couldnt do that for previous years).

Any thoughts/help would be welcomed ?

Thanks - iguy

[FarmerPalmer]

Pension contributions are for employees and not shareholders, do not get them mixed up.

Is your wife an employee, if not, then no the company may not pay pension contributions for them.

Would you and or your partner expect to receive the salary and pension contributions suggested as payment for the work done for the company, i.e. is this a valid business expense.

If for example your wife "does the books" then how much would you expect to pay a bookkeeper for a similar standard of work, and does what you pay your wife (including pension contributions) exceed this.

If it does then it could be classed as not a legitimate business expense, and is merely a vehicle for tax avoidance.

Otherwise fill your boots.

[Jessica@WhiteFieldTax]

As a Farmer Palmer has said, don't confuse directors and shareholders.

There is no HMRC requirement for contributions to pro rata shareholdings, nor (as far as I am aware) are HMRC "cracking down" on anything.

Where the problem arises is that to be deductible pension contributions need to be "reasonable".

For a typical PSC director this isn't a problem, since it's a case of eat what you kill.

For someone who is presumably not main fee earner, maybe not a fee earner at all then it's a different matter. HMRC would likely seek to disallow contributions if they weren't reasonable for work done/input to company. Put simply if the 30% shareholder isn't contributing £40k of revenue it's unlikely to fly.

[SueEllen]

For a typical PSC director this isn't a problem, since it's a case of eat what you kill.

What is this PSC you speak about?

I cannot find any legal reference to it. I can only find definitions and legal information on the terms "private companies limited by shares" and "closed company" which lots of small businesses run.

[Jessica@WhiteFieldTax]

What is this PSC you speak about?

I cannot find any legal reference to it. I can only find definitions and legal information on the terms "private companies limited by shares" and "closed company" which lots of small businesses run.

Yes, agree. Sometimes it's a convienant shorthand though; most people here will, or ought to, know what it means. Context is everything.

[MarillionFan]

Of course, if you want to back date her pension via her self assessment via carry forward rules you can of course do that outside the company.

[iguy2008]

Of course, if you want to back date her pension via her self assessment via carry forward rules you can of course do that outside the company.

Hi

In answer to the questions:

(a) We are not marrried.

(b) She is an employee and director. She is a fee earner (but not the main one) bringing in about £25K per year based on a 3 day a week contract.

I hope that helps.

Thanks - Iguy

[SueEllen]

Yes, agree. Sometimes it's a convienant shorthand though; most people here will, or ought to, know what it means. Context is everything.

Convenient shorthand for what?

If the definition actually had any meaning you would have defined what it meant instead of inferring we understand or should understand what you are talking about.

[SueEllen]

Hi

In answer to the questions:

(a) We are not marrried.

(b) She is an employee and director. She is a fee earner (but not the main one) bringing in about £25K per year based on a 3 day a week contract.

I hope that helps.

Thanks - Iguy

Accountants aren't allowed to give pension advice as it's not what they are trained in. In the same way you wouldn't ask the accountant to give you legal advice on contract law you would use a solicitor, for pensions you use a financial advisor.

So if the financial advisor has said it's OK and how it should be done then go ahead.

Also be aware some accountants and some agencies will make up what they think the set up of your company is with out asking you even if the structure they talk about has no legal definition. So in future always tell them first that there are two directors and more than one fee earner.

[Contreras]

Hi

In answer to the questions:

(a) We are not marrried.

(b) She is an employee and director. She is a fee earner (but not the main one) bringing in about £25K per year based on a 3 day a week contract.

I hope that helps.

Thanks - Iguy

Total remuneration (salary + pension) must be "reasonable" for the duties involved. For a single employee and sole fee-earner this is easily justified. Where there are two employees and both are fee earners then if the remuneration was not broadly in proportion to the value of those employees there could be a risk that the large pension element is challenged as avoidance.

It has absolutely nothing to do with proportion of shareholdings. Check back with the IFA and if they insist that the pension must be in proportion of shareholdings then look for a new advisor. IMHO, you should be seeking advice from a tax specialist accountant for the non-investment aspects of your decision.