Reply to: Backdating Pension Contributions -For 1 Director Only IS it Allowed

[Contreras]

Relevant thread linkup :-

http://forums.contractoruk.com/accou...y-pension.html

[TheFaQQer]

On that basis, he has suggested that I create a new pension for myself and pay in £60,000 and £30,000 inline with the overall renumerations that we both receive (no backdated payments)

You'll pay tax on that extra £20k you're putting into your new pension, remember.

[SueEllen]

Hi

On that basis, he has suggested that I create a new pension for myself and pay in £60,000 and £30,000 inline with the overall renumerations that we both receive (no backdated payments)

This I wouldn't do.

See Contreras' advice above.

If you can pay into an existing pension then do so, otherwise set up a pension e.g. SIPP independent of the IFA.

[iguy2008]

Hi

OK. My accountant says the rules have changed so much that he cannot comment. I have told my IFA that I want to be cautious and have something that defensible and correct based on my siituation.

On that basis, he has suggested that I create a new pension for myself and pay in £60,000 and £30,000 inline with the overall renumerations that we both receive (no backdated payments)

I have heard the comments re finding an accountant skilled in this but since Im already paying my accountant and IFA, it frustrates me that I have to go to a 3rd party (but I will anyway).

Any other comments are welcome.

Thanks - Iguy

[Contreras]

Hi

OK, I now see that there are 2 parts to the question:

(a) Is it ok for 1 employee to have there pension contributions backdated (independently of the other employee/main fee earner) - there is a suggestion that this has no relation to the shareholding of the directors. I also want to be clear that if I did have an existing pension then I would backdate mine also.

(b) It is ok to backdate the amount upto £40,000 if the fees being brought in is less than that amount) and this could be considered as tax avoidance (something I dont understand fully as the pension would be taxable when taken)

Shareholding % is virtually* irrelevant, there is no question about that.

Regarding what is reasonable pension contribution you must look at the total remuneration package for each employee. E.g. if your services brought in 75% of revenue and your total remuneration is £10k salary, is it reasonable for the other employee to receive £120k pension? It could be argued that this was artificially contrived, avoiding NICs, and therefore might be disallowed as a company expense.

Secondly, and again with respect to total remuneration, is this covered by profit in the current year? If you plan to use retained profit, effectively creating a loss for the current year to offset previous CT, there is no clear guidance on this that I am aware of.

Both of the above are real risks IMHO. Albeit maybe low risks, but I would be VERY uncomfortable trusting advice on this from the same IFA that is selling the pension. I think you need a tax accountant with a track record in dealing with HMRC and one that is prepared to commit to a reasoned opinion that could be used in your defence if it ever came to it.

Lastly, beware of letting the tax tail wag the dog. IMHO you should be taking dividends up to the high rate threshold already, have used up the current year's ISA allowance, and made personal pension contributions of 100% salary, or at least have given consideration to all these things.

* except with the feint possibility of your dividends being deemed as salary, given the otherwise disproportionate remuneration.

[Jessica@WhiteFieldTax]

(a) Yes, categorically.

(b) All depends. The pension payment has to be "reasonable"*1 for business to get a deduction against Corporation Tax - that its taxable on retirement is irrelevant in HMRCs eyes. "Reasonable" is imprecise, some may argue that was deliberate on HMRCs/HMTs part - it would be hard for HMRC to argue unreasonableness in a single person/single income stream situation. Its easier for them to argue so if there are multiple income streams and, as you seem to propose, your partners pension contribution is more than the revenue she brings in. Sorry there is no certainty here, it depends on your appetite for risk; to be safe restrict your partners contribution to less than the revenue they bring in.

*1 I think the wording is "reasonable" rather than "wholly and exclusively" - amounts to the same in practice. I haven't checked source.

[iguy2008]

Hi

OK, I now see that there are 2 parts to the question:

(a) Is it ok for 1 employee to have there pension contributions backdated (independently of the other employee/main fee earner) - there is a suggestion that this has no relation to the shareholding of the directors. I also want to be clear that if I did have an existing pension then I would backdate mine also.

(b) It is ok to backdate the amount upto £40,000 if the fees being brought in is less than that amount) and this could be considered as tax avoidance (something I dont understand fully as the pension would be taxable when taken)

Thanks Iguy.

[Jessica@WhiteFieldTax]

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.

Convienant shortcut for a company which derives most of its income from the services of one individual with little other direct expense.

I agree it's not a term defined at law, and that particular point is one I was running, at length, with HMRC fifteen years ago during the first batch of IR35 compliance activity.

I agree about not shoehorning people into inappropriate classification, but I don't see the need to reinvent the wheel when a convienant short cut definition exists for working purposes.

[Jessica@WhiteFieldTax]

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.

That would imply a personal contribution, so limited to £3,600 or pensionable income, I think.

[Jessica@WhiteFieldTax]

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

I would suggest you will struggle to get HMRC to agree a deduction for much more than £25k for your partner, although if you have a situation where your partner has brought in money for a few years and had a much smaller remuneration package in those years then you may be able to carry back against that.

Without seeing accounting details for earlier years - income, salaries, split by partner, it's difficult to advise further on this.

The advice reported from the FAs "internal accountants", if correctly stated, is wrong. There is no express requriement to make contributions in proportion to shares, but I do wonder if some of the detail of the reply has been lost or paraphrased?

[Jessica@WhiteFieldTax]

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.

Many accountants and solicitors will be authorised to provide advice on pension issues. Obviously I cannot speak for other firms posting here, but I know that my firm is, via the Exempt Professional Firms register.

[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.

[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.

[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.

[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