Reply to: Pay director/shareholder wife pension in lieu of a salary?

[ASB]

Even if the contributions are not allowable for ct purposes there may be scope for relief to be obtained by the individual via satr as a third party contribution.

this may potentially provide the same net effect.

Edit: I was assuming she was a higher rate payer. Basic rate relief is still obtained by the pension fund and it is part of the annual allowance and contribution limit.

[Qdos Contractor]

The company can meet pension contributions on behalf of the female director & those contributions will be available for CT relief but only in cases where the contribution is part of a remuneration package paid wholly and exclusively for the purposes of the trade.

Whether there is a non-trade purpose for the payment will depend upon the facts of the individual case but where there is a non-trade purpose for the payment, then the payment or part thereof is disallowable for C.T purposes.

One situation where all or part of a contribution may not have been paid wholly and exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer. In this situation HMRC will consider whether the amount of the overall remuneration package, not simply the amount of the pension contribution, was paid wholly and exclusively for the purposes of the contractors’ trade.

On occasion an employer may make an increased pension contribution on the basis that a scheme is underfunded. In this situation HMRC will not only compare contributions between periods but also the history of remuneration and contributions, before challenging a deduction based solely on annual comparatives.

Care must also be taken not to exceed the annual allowance for personal tax purposes which is £40K. This is the maximum that you (personal + company contributions) can contribute to all pensions in one year, without incurring a tax charge. There are three exceptions to this, in particular, where someone has ‘adjusted income’ in excess of £150K (this includes salary & dividends). In this case, the annual allowance is tapered down.

[ContrataxLtd]

Hi AndyT

Lots of good information in the thread already but a few things I'd probably mention if advising (based on the facts given).

1. IR35 - You should definitely get your contract & working practices reviewed in relation to IR35, you may not be inside so worth checking. If you are there are a few things that can be done to mitigate this to an extent;
2. Pension - An allowable expense when calculating the deemed payment for IR35 purposes so if you are inside well worth a consideration. However, contributions to your wife's pension wouldn't be an allowable expense in your IR35 deemed payment.
3. Benefit's in Kind - These sometimes become more attractive if inside IR35 but this can often be a long term solution to a short term problem i.e. if next contract is outside IR35 then you probably aren't efficient anymore.

If you are outside IR35 then you have much greater flexibility and can probably stick some money in your pension, some in your wife's (in relation to a reasonable remuneration package etc.) and take some dividends between you.

As others have said, shortlist a few accountants and give them a call to discuss further,

Martin
Contratax Ltd

[Fred Bloggs]

OP, I think you're basically on the right track here. I run a similar strategy though me and Mrs Bloggs each take £5k divis. I would be wary about large pension contributions to Mrs OP until she is contributing fully to the business. Until she is, I'd be wary about large sums paid into a pension for her.

BTW, you will find the forum much more pleasant to use if you put one or two posters into your ignore list.

[Cirrus]

Thanks Sue, from everything I have seen so far (and I'm still learning obviously) pensions may have something to do with IR35 if you use them as a method of tax planning.

Company Pension contributions appear to be deemed as within the 95% salary

I'm not quite sure what you are saying. My understanding - as a barrack room lawyer like everyone on this channel - is you can always have the same benefits that a PAYE employee has. They can have pension up to the limits, tax free. So you can as well.

[SueEllen]

Yep, I guess most of you started with one like me though?

As you suggest there will be other clients. Hopefully my next contract will be more clearly outside of IR35 and I won't need to be quite so cautious.

Both the contract AND working practises need to be outside IR35.

This is why:
1. You should get the contract reviewed
2. Ask questions during the interview about the working practises

[AndyT]

I notice you are talking about one client - the majority of us have several. Even the contractors who have a client for years have more than one during their contracting career.

Yep, I guess most of you started with one like me though?

As you suggest there will be other clients. Hopefully my next contract will be more clearly outside of IR35 and I won't need to be quite so cautious.

[SueEllen]

I notice you are talking about one client - the majority of us have several. Even the contractors who have a client for years have more than one during their contracting career.

[AndyT]

@AndyT if your contract and working practices are outside IR35 you can invest money you take out of the company anyway you like.

Thanks Sue, yep that would be ideal, but as I mentioned in my first post, from what I know of how my prospective client works, it looks like I would be at risk of being inside IR35 or at best being on the margins of doing so. If I can get to a position where IR35 ceases to be a concern anyway (without massively upping the tax liability) then that's got to be the next best thing I guess.

You also don't seem to be aware that if your contract is within IR35 you cannot claim travel expenses, which limits the area you can take contracts from.

I don't think I mentioned travel expenses, but I was not aware of that (that looks to have come in this April, lucky me!) so thanks for the heads up.

The client is only a few miles down the road though, so travel expenses will be low and potentially a small price to pay for not having to worry about an IR35 letter from HMRC one day.

I'm just a fairly cautious guy by nature, so if I can get inside/outside IR35 fairly close to each other (with the pension contributions) in my particular situation, and maybe only getting hit with a few grand of extra tax, then that might be a price I'm happy to pay for a quiet life.

I'm hoping I can select and chat to a contract accountant next week to go through this properly, and work out an approach with them.

Thanks again.

[SueEllen]

@AndyT if your contract and working practices are outside IR35 you can invest money you take out of the company anyway you like.

You also don't seem to be aware that if your contract is within IR35 you cannot claim travel expenses, which limits the area you can take contracts from.

[AndyT]

@AndyT pension contributions have nothing to do with IR35.

Thanks Sue, from everything I have seen so far (and I'm still learning obviously) pensions may have something to do with IR35 if you use them as a method of tax planning.

Company Pension contributions appear to be deemed as within the 95% salary that IR95 requires. One could therefore potentially use big pension contributions as a way of getting money out of the company without going through PAYE and income tax. (Subject to the £40k limit Cirrus mentioned). It's particularly appealing to me as that's where I would be putting that it at the moment anyway (along with ISAs that obviously I can only fund personally).

My hope is that if the money goes directly into pensions then we may get to a point where IR35 is almost irrelevant (as 95% of the billed income is salary or pension contributions anyway as HMRC would want). And we aren't risking big dividends that might bite us later.

Also don't use an accountant to do your contract reviews use an IR35 specialist e.g. QDOS, Bauer and Cottrell or a lawyer (there are plenty who write articles for the main site).

Yep I'm thinking more of the accountant to advise me on the best ways of coping with IR35 and tax planning for it, rather than deciding if it applies to me and my contract or not. If Pensions aren't going to work and it looks borderline though I'm certainly tempted to look at Qdos etc.

Thanks again.

[SueEllen]

@AndyT pension contributions have nothing to do with IR35.

There are links on the main site plus IPSE has information to give you an idea what IR35 is.

Also don't use an accountant to do your contract reviews use an IR35 specialist e.g. QDOS, Bauer and Cottrell or a lawyer (there are plenty who write articles for the main site).

[AndyT]

Thanks for that, yep Gorilla and some of the other FreeAgent accountants are on our short list.

[northernladuk]

There is no point trying to convince us your wife will do anything for the company. If you go with an accountant that offers freeagent it takes a couple of minutes a week tops. Pay her if you want but don't try and kid yourself she's working for the company.

Have a look at Gorilla accounting who I'm with (and a number of other posters). They will advise on the best setup and get you up and running on Freeagent.

If you are not sure you can try Freeagent for free.

[AndyT]

Thanks for that, to be clear I wasn't looking for advice on here that I would just blindly follow.

I was looking more for what other contractors out there do, and who helped them set it up. So I know the scope of what's possible and some candidate accountants. I am completely, 100% looking to pay for proper advice so we get this setup right, we are really early on in the process and still learning.

As I say, we are looking for a contractor accountant at the moment. I think I'll leave this here now and approach some directly in the week asking them if they are experienced in using pension contributions to mitigate IR35, and as compensation for a director who isn't yet billing. I'm also looking at those who give IR35 reviews and/or provide IR35 investigation insurance.

Oh and our bookkeeping even if you have 3-4 clients is generally a piece of p*ss as you don't have tonnes of entries to keep on top of day in day out.

Yep precisely!

A trained monkey could do it, but somehow the fact that my wife will be doing it and happens to specialises in an unrelated branch of accountancy makes this a bad idea.