Unlimited Pension Contributions?

[richardwilshire]

For those who are interested the Revenue guidance is here

http://www.hmrc.gov.uk/practitioners...d-pensions.htm

Personally, I find it very hard to decipher!

[Nixon Williams]

My original point was in reply to a posting who paid themselves a salary of £8000 and wanted to make pension contributions of £25000 - the Revenue do allow contributions of this size and bigger.

BUT the contribution is only allowed if it is "made wholly, and exclusively for the purposes of the employer's trade". My argument is that the Revenue will deem that in cases of low salaries below the commercial rate, very large contributions will be for a non-trade purpose.

The factsheets are very confusing but in my opinion (until more is known how the Revenue will judge contribution levels) you should not contribute more than 100% of the salary.

So Bradley I am happy with what I advise and I will sleep well tonight.

Alan

[Billy Pilgrim]

What about this bit from section BIM46025

The type of additional evidence to look for to be satisfied that the contribution to the scheme is paid wholly & exclusively for the purposes of the trade would be:

"Where the salary is less than the commercial rate and the size of the pension contribution appears to have been inflated, you will need to establish why this has been done and whether any tax or National Insurance planning for the employees was one of the purposes for the size of the pension contribution rather than an incidental benefit arising from it."


Is that not a bit scary for low salary / high divvy / high pension contributions ??

[Nixon Williams]

What about this bit from section BIM46025

The type of additional evidence to look for to be satisfied that the contribution to the scheme is paid wholly & exclusively for the purposes of the trade would be:

"Where the salary is less than the commercial rate and the size of the pension contribution appears to have been inflated, you will need to establish why this has been done and whether any tax or National Insurance planning for the employees was one of the purposes for the size of the pension contribution rather than an incidental benefit arising from it."


Is that not a bit scary for low salary / high divvy / high pension contributions ??

Could be scary, that is the point that I was trying to make.

Alan

[Bradley]

Are you working for the Revenue?

My original point was in reply to a posting who paid themselves a salary of £8000 and wanted to make pension contributions of £25000 - the Revenue do allow contributions of this size and bigger.

BUT the contribution is only allowed if it is "made wholly, and exclusively for the purposes of the employer's trade". My argument is that the Revenue will deem that in cases of low salaries below the commercial rate, very large contributions will be for a non-trade purpose.

The factsheets are very confusing but in my opinion (until more is known how the Revenue will judge contribution levels) you should not contribute more than 100% of the salary.

So Bradley I am happy with what I advise and I will sleep well tonight.

Alan

Don't you get that if you are a Director and a controlling shareholder then the Revenue have already said that they will just accept that the payment is made wholly and exclusively? It doesn't matter that the salary is low and the pension contribution high.

Saying that you shouldn't contribute more than 100% of your salary is just plain wrong advice for controlling Directors in all cases and for most employees in other cases. What if the employee is trying to catch up her fund due to taking time off on maternity leave for example? Are you saying that the Revenue would never take that into account?

You certainly seem to have a pro-Revenue stance here. I hope that the advice you're giving to your clients is a little more considered.

[Nixon Williams]

Don't you get that if you are a Director and a controlling shareholder then the Revenue have already said that they will just accept that the payment is made wholly and exclusively? It doesn't matter that the salary is low and the pension contribution high.

Saying that you shouldn't contribute more than 100% of your salary is just plain wrong advice for controlling Directors in all cases and for most employees in other cases. What if the employee is trying to catch up her fund due to taking time off on maternity leave for example? Are you saying that the Revenue would never take that into account?

You certainly seem to have a pro-Revenue stance here. I hope that the advice you're giving to your clients is a little more considered.

I think I have made my case clear sorry you cannot see it. I am not "pro-Revenue" but I do not go out looking for trouble, there are plenty of accountants out there that will do that for you if thats your bag.

We do not advise clients on pensions but point them towards an IFA if they want to pay into a pension.

[dude69]

Quote from HMRC guidance:

So, in other words, if you own your own company then you can contribute pretty much what you like including amounts over £215,000.

I get the impression from the above that you're more concerned with saving face than getting to the right answer.

You are absolutely wrong

Here's the relevant guidance from HMRC:

http://www.hmrc.gov.uk/practitioners...d-pensions.htm

an employer's contribution to a Registered Pension Scheme will be allowable as a deduction if it satisfies the wholly & exclusively for the purposes of the trade test in ICTA88/S74 (1)(a) and ITTOIA05/S34.

The payment of a pension contribution is part of the normal costs of employing staff. It will only be disallowable where there is an identifiable non-business purpose for the employer's decision to make the contribution to a registered scheme, or for the size of the contribution.

[it will not be allowable]

If there is a non-trade purpose for the size of the contribution paid in respect of a controlling director or an employee who is a close friend or relative of the controlling director or proprietor of the business (see BIM46020);

In deciding whether the deduction is allowable the question is whether the decision to make the pension contribution was made wholly and exclusively for the purposes of the trade (ICTA88/S74 (1)(a) and ITTOIA05/S34).

The following principles need to be taken into account in deciding whether the pension contribution passes the wholly and exclusively test:

* To find out whether the payment was made for the purposes of the taxpayer’s trade it is necessary to discover the taxpayer's object in making the payment.
* The general rule is that establishing the object behind making the payment involves an inquiry into the taxpayer’s subjective intentions at the time of the payment.
* The 'purposes of the trade’ means ‘to serve the purposes of the trade’.
* The "purposes of the trade" are not the same as "the purposes of the taxpayer".
* The "purposes of the trade" does not mean ‘for the benefit of the taxpayer’.
* The purpose for making the payment is not the same as the effect of the payment.
* A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. This will be the case if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment.

[Also:]

A pension contribution to a Registered Pension Scheme in respect of any director or employee will be an allowable expense except where there is a non-trade purpose for the payment.

One situation where all or part of a contribution may not have been paid wholly & exclusively for the purposes of the trade is where it is paid in respect of a director who is also a controlling shareholder or an employee who is a close relative or friend.

For example, a small company may employ the only shareholder's spouse. The company pays him a salary of £40,000 and contributes to a registered pension scheme that is to provide him with pension benefits.

The type of additional evidence to look for to be satisfied that the contribution to the scheme is paid wholly & exclusively for the purposes of the trade would be:

* Are there any comparable third party employees? If the spouse works alongside an unrelated third party and they have comparable salaries, pension contributions, terms and conditions, this would indicate that there is not a non-trade purpose for paying the pension contribution.
* If the pension contribution paid on behalf of the spouse is greater than that for an unrelated third party, then is there any business reason for this? Or is this an indication that there was a non-trade purpose for the payment?
* Additional information could indicate that there are special reasons for the size of the pension contribution. For example, the pension fund may have a funding deficit as a result of losses on its investments.
* It is possible that the right question is not so much the level of pension contributions, as the level of salary. Does the level of the salary reflect the value of the work undertaken by that individual for the employer. If not, then it is likely that that there is also a non-business purpose for the payment of the pension contributions.
* Where the salary is less than the commercial rate and the size of the pension contribution appears to have been inflated, you will need to establish why this has been done and whether any tax or National Insurance planning for the employees was one of the purposes for the size of the pension contribution rather than an incidental benefit arising from it.

The facts are damning: when the salary is below commercial rate and the pension is very high, and not only that, but the director of the company is also the company's owner, then the purpose of the contribution is *not* a normal trading expense, necessary to keep the employee in comparison to other businesses (which would be allowable), but rather a deliberate tax-avoidance device.

The contribution is intended to reduce CT liability.

It's clear that any contribution over 100% of salary (and even that might be pushing it) where the contribution is made to you as shareholder, the intent is to reduce CT liability artificially: it's blatantly obviously not "wholly & exclusively for the purposes of the trade".

Here's a layman's reading:
http://www.pkf.co.uk/download/CT%20for%20pension.pdf

I will probably be paying 100% pension contributions to me + wife (about £11k total), as the 40% tax saving is well worth it.

[xoggoth]

Have a look at this

http://www.hmrc.gov.uk/practitioners...d-pensions.pdf

[ASB]

"It's clear that any contribution over 100% of salary (and even that might be pushing it)"

I am *pretty* sure there is other specific guidance (but I can't find it) which states that relief is always available for contributions up to 100% of salary. Only beyond that does it become a potential issue.

[XLMonkey]

I think that the big problem here is that the new rules on pension contributions have changed due to the new Pensions Act, but there is relatively little case law for practitioners to use in deciding what's legal and what isn't. All that this HMRC guidance amounts to is an attempt by them to take the initiative in deciding what's lawful and what is not. Until we have a few challenges in court, we can't really tell whether HMRC have got it right or wrong (I suspect, as usual, that they've got it completely wrong).

The problem is that their Wholly and Exclusively line is a completely meaningless test: it assumes that there is a difference between
- compensation paid to the employee for the purposes of trade, and
- compensation paid to the employee for their own benefit.

Employee compensation, by it's very nature, is for the benefit of the employee (the taxpayer). Therefore, the distinction is meaningless. It's for the business to decide what an appropriate compensation package, and the employee to decide whether or not to take it. Having decided to take it, the employee has every right to organise his/her affairs to minimise the tax liability, so they can have it either as salary or pension contributions, exactly as they wish (provided that the employer agrees).

The guidance HMRC have set out effectively leaves the decision on pension contributions in the hands of the local tax inspector. I suspect that, once challenged in court by a suitably high powered merchant banker (who will be paid £1 but getting a £1M one-off pension contribution, making our numbers seem somehow trivial); we'll find that you can put what you like into your pension as long as you don't exceed the long-term cap.

Until then, it's just a question of what you personally feel you can justify - I do 10k salary, 10k pension contributions, and am happy to argue the toss with the tax inspector when he comes.