Reply to: Stakeholder pension contributions

[Mailman]

Forget the pension. It'll be worth bugger all when you retire anyway. Invest in property and/or land.

Yeah see, this is the thing. Why would you waste your money by putting it away in a zero percent pension plan when you could actually use it now to invest in property?

Mailman

[beep]

Hmm, EPP, etc.

As someone who has an EPP (but have not paid into it since switching from a Ltd. company to an Umbrella), can anyone here advise what options there are?

I spoke with an "Independant Financial Adviser" who just tried to sell me insurance, and have written to the BBC Working Lunch hoping that they may take an interest.

If possible I'd like to switch it to a stakeholder pension, as the fees are lower. I get the feeling that the investment clowns would see that as a bad thing for them, and somehow stop/charge this action.

The banks have even lowered interest rates due to customers being more savvy, and moving their money from low to high interest accounts now.

Sounds like the property investment idea is a good one. Let's just hope there are enough people earning to afford to buy our property when it's time to sell!

Cheers,

Beep

[IR35 Avoider]

The only point of an EPP is so you can make larger contributions - there's no way you should sign up to one now, as the rules are going to allow exactly the same contributions to all types of pension schemes from 6th of April. i.e. an EPP will have no advantages but will almost certainly be hugely more expensive.

I can confirm what tacpot said about how easy it is to make an employer contribution - he outlines exactly the procedure I followed the first time. Subsequent times were even easier as I just kept a double-sided photocopy of the form as a master to copy new forms from each time I needed one.

[tacpot]

A Stakeholder is perfectly fine for this. I rang up my Stakeholder Pension co., explained that 'my employer' wanted to make a one-off payment into my Stakeholder pension. They sent me a form to fill out. It was very straightforward, I sent them the form along with a cheque, and the investment appeared on their system within three days.

[ASB]

Stakeholder is fine. So is an EPP. There is no compulsion on a stakeholder to accept employer contributrions, but I doubt if here are any that don't. Certainly not a problem for L + G (who I found utterly useless) or Scottish Widows.

http://www.hmrc.gov.uk/pensionscheme...ployers-v2.pdf
http://www.direct.gov.uk/MoneyTaxAnd...106&chk=h2rZgl

[malandri]

Last question!

Thank you all for the information so far. I understand now the difference between personal and company contributions. So, for someonle like me that operates inside IR35, the best way is to have my Ltd contributing to my pension plan. Do i need to have an executive pension plan for this, or a stakeholder pension plan is perfectly fine as well?

Many thanks

[IR35 Avoider]

IR35 Avoider. Have you considered the lifetime cap? It is nowhere near as generous as you think. 40k contributions a year for 10 years with a 20 year investment timeframe will get close. Don't forget the excess is taxed at 57% (i think). Also might be sensible to review current arrangements to ring fence the existing benefits.

It's not really that hard to avoid overfunding. I put all my money in commercial property which is likely to yield between 6% and 10% a year (though there seems to be a bit of a bubble at the moment.) I'll probably give up work in the near future anyway, but in the extremely unlikely even that I carry on for year after year and my fund approaches the limits, I can just stop contributing and switch as much as necessary into government bonds to stay under the limit.

My current funds are less than 100K, so ring-fencing is not an issue.

However, I personally take the view that the actual legislation doesn't use words like reasonable so the IR can just FOAD. Of course, when/if they challenge it's difficult to fight an opponent with potentially infinite pockets. So good luck

I just playing it by ear at the moment - the arguments above are just a provisional strategy. I suppose the PCG helpline might provide some assistance. What's the worst case scenario? HMRC start investigating. As an employee I decide I don't like the prospects and start putting my income through an umbella. If HMRC win, the company ends up owing tax on two years contributions, the investigated year and the following one. As director of a company that then has no money (because the tax they want was spent as part of the pension contribution they've now disallowed) I write to them and ask where they think the money to pay the tax bill is coming from, and ask if they have any objection to the company being wound up, without paying them. (Though I will offer to flog the company fixed assets on Ebay and send them a couple of hundred quid that raises.) As long as I've committed no wrong-doing in my role as director I should be OK. Serves them right for not issuing clear-cut guidelines. (OK this is a bit of a fantasy - but it could happen...)

As I said, this is all provisional. The kind of guideline I'm hoping the PCG will extract are for example that anything paid out of an IR35-caught 95% is OK. (I think HMRC have said that they won't challenge pension contributions in circumstances where they would have allowed a salary bonus of the same amount. Well IR35-caught in a sense makes bonuses mandatory - everything you don't explicitly take as salary becomes implicit salary via a deemed salary "bonus.")

The main ground for challenging "wholly and exclusively" is when the overall remuneration is more than the job deserves. This doesn't apply in an IR35-caught situation.

Their other angle is to prove a non-trading intention (e.g. tax planning) as the reason for the salary/pension split. I will take legal advice before phrasing any answers I may give as to what my intention was. My remuneration policy is my first attempt to come up with an answer capable of passing this test. (In reality of course no-one would put money into a pension if there wasn't a tax advantage, so following HMRC guidelines to their logical conclusion, no owner-director is ever allowed to make pension contributions of any size. I hope an impartial adjudicator while find that so extreme that they will conclude that the guidelines are wrong.)

If HMRC do issue a guideline that 100% is the most they will allow, I will comply with it. 100% is still pretty good.

[ASB]

IR35 Avoider. Have you considered the lifetime cap? It is nowhere near as generous as you think. 40k contributions a year for 10 years with a 20 year investment timeframe will get close. Don't forget the excess is taxed at 57% (i think). Also might be sensible to review current arrangements to ring fence the existing benefits.

I believe the revenue are using 100% of salary as reasonable. All scheme payments are notified back to the revenue of course. Whether they ever tie it back to your tax records is a different matter but they were pretty good at doing that in the current regime.

However, I personally take the view that the actual legislation doesn't use words like reasonable so the IR can just FOAD. Of course, when/if they challenge it's difficult to fight an opponent with potentially infinite pockets. So good luck.

[tim123]

Well I still don't agree with the "almost certainly" part of what your say. If fact I would say the situation is exactly the converse; the rules currently say you can do this, there is just a slight shadow being cast in the form of internal guidance being published in HMRC manuals. To quantify the difference between us, you are saying there is a 95% chance you can't make larger than 100% contributions and I'm thinking there is a 95% chance you can.

I am saying that I have read that others (more knowledgable than me) are saying that.

And the discussion isn't just about larger than 100%, It's about all numbers up to infuinity percent.

tim

[IR35 Avoider]

How is suggesting that someone can get Tax&NI relief by paying 100K from their company into their pension, whilst at the same time paying themselves a salary of zero for the year, a simplification, when it is (almost certainly) plain and simple wrong?

Well I still don't agree with the "almost certainly" part of what your say. If fact I would say the situation is exactly the converse; the rules currently say you can do this, there is just a slight shadow being cast in the form of internal guidance being published in HMRC manuals. To quantify the difference between us, you are saying there is a 95% chance you can't make larger than 100% contributions and I'm thinking there is a 95% chance you can.

One of the reasons I didn't raise the issue originally is that I was hoping for clarification this week - the PCG did say they were going to publish something. Hopefully clarification will still come, from them or elsewhere, within the next few weeks.

Until clarification changes things, based on my assessment of the "interpretation" and my own circumstances (which are very untypical) I am still intending to make pension contributions of several times my salary. I think I have a fighting chance of winning if I'm challenged and I think there is probably only a small chance I will be challenged.

If I am challenged the Inland Revenue will have to justify (to the special commisioners if necessary) why they think my contribution is not "wholly and exclusively for the purposes of trade." Among the arguments I may bring to bear are:-

1. I can prove my financial circumstances are such that I don't need to take even the small salary I will be taking. (They can't argue that I'm "tax-avoiding" by paying less than I need to live on. I'm not sure that kind of argument is relevant in this situation anyway.)
2. I am IR35-caught, so the company is required by law to incur a remuneration expense of 95% of revenue. An expense that is required by law must be deductible for Corporation tax purposes. It is immaterial to the companies "purposes of trade" how this remuneration is split between salary and pension.
3. The company has to offer my employee (myself) a split between salary and pension at least as generous as the most generous umbrella company that will be competing for my services as an employee. (I am hoping the umbrellas will get into a bidding war with each other to set the bar at a level that makes this angle helpful. If the umbrellas are helpful, I might even switch to one. An umbrella which has an arms-length commercial relationship with employees is less likely to be questioned than owner-directors employing themselves, whom HMRC have specifically said they will monitor.)
4. I have a documented remuneration policy, reviewable once a year, which sets each year's salary slightly above the level of the projected pension that in theory will one day replace it. In other words, salary and pension are being maintained in a reasonable relationship with each other. Company and indeed civil servant defined benefit schemes have often offered pensions of two thirds of salary, as a director of a one man company with the relative insecurity that entails it's not unreasonable for me to push things a little further to fund a pension a little under 100% of salary.

The projected pension is recalculated on the annual review date based on the then current valuation of all the employee's pension funds. Unfortunately, due to past underfunding, it will take several years of pension contributions of greater than 100% of salary before salary rises above the level of pension contribution. The HMRC internal guidance specifically mentions past underfunding as a valid reason for larger contributions. It also helps that I calculate the pension projection on the following assumptions:-
a. There will be no contributions after the current year. (I can't assume I will find work in future.)
b. I intend to retire at 55. (So I will need a huge fund to last me 35 years.)
c. I will buy an inflation-linked annuity at 55 that pays a 100% pension to my wife if I die first. According to tables on the FSA web site, the best such annuity (from Canada Life) will only return me income of 2.6% on my pension savings in the first year, so I am going to need a really huge sum. (I probably won't buy such an annuity of course, but I am entitled to plan on the basis that I might want to.)
d. The annuity will have to be funded by what's left of my pension fund after I take a 25% tax-free lump sum, as I'm entitled to do, so I'm going to need a really, really huge sum.
e. I assume my fund will grow between now and retirement at only 4% in real terms. This is the conservative rate of 5% used by insurance companies less 1% to allow for stakeholder charges. I actually pay less than 1% at the moment, but it is reasonable to plan on the basis that I might want to switch to more expensive funds.

Warning: I haven't run these arguments past a tax expert yet (still hoping clarification will render them redundant) so have had no feedback whether they are likely to do any good, and I'm aware that some of them are dangerous. (HMRC have said that any hint of tax planning is a sign of a non-trade purpose.) So copy at your own risk.

[tim123]

A bit unfair, as the post you quoted was made before the comments about employer contributions being disallowed.

I meant that you are not keeping up with the (interpretation of the) legislation.

OK, I accept that you knew what I posted, but I don't see how it is reasonable for you to have kept this information back in the interests of simplicity.

How is suggesting that someone can get Tax&NI relief by paying 100K from their company into their pension, whilst at the same time paying themselves a salary of zero for the year, a simplification, when it is (almost certainly) plain and simple wrong?

tim

[ASB]

ASB, why cy contributions are better than personal ones? I was planning to have a stakeholder pension funded by myself and expense it every month to the company

IR35 avoider gave you some words. I'll try and show you by some numbers.

The 95% amounts to 20,000.

Pay that as salary then:

ER's NI = (18285-4888) * 12.8% = 1715
Taxable Salary = 18285
EE's NI = (18285 - 4888) * 11% = 1473

Tax on 4895 @ 0 = 0
Tax on 2020 @ 10% = 202
Tax on 11370 @ 22% = 2501

Net pay = 14311

If you chuck that into a pension you get relief of 22/78 = 4036. Total to pension = 18387.

Alternatively you could just have put 20k in the pension from the company.

This is not necessarily the way to maximise the amonut going into the pension. The most effcient way would be a salary of 4887 which attracts no tax or ni.

This would yield [assuming you still get tax relief which I beleive to be true] 6265 into the pension. 15113 is still in the company ready to be contributed giving total value in the pension of 21378.

Of course the calculation you need to do and what is approrpiate for your circumstances only you can figure out.

[IR35 Avoider]

and expense it every month to the company

In the past I've found that pension providers often charge less for single contributions than regular monthly contributions.

I pay salary bonuses and/or single contributions twice a year, once just before the company year end and once just before the personal/IR35 year end. I calculate them to offset all my IR35 liability for the year-to-date.

Paying a company single contribution just means signing a simple form I got from the insurance company and sending it off together with a company cheque. There's nothing complicated about it.

I sometimes forget to keep the acknowlegement letter the pension company sends - which means I have to go into their web-based pension account system to get a screen print of what I've contributed - otherwise the accountant (and later HMRC) have no way of know that I haven't spent the money on loose women... (In future I intend to try and remember to keep the letter.)

[IR35 Avoider]

why cy contributions are better than personal ones?

Because you don't pay NI on them. When you pay personal contribution you don't get back the NI you've already paid on that money. When the company pays contributions, no NI is paid as the money was never salary.

Speaking very loosely, for salary below the higher-rate band, roughly half the tax you pay is NI rather than income tax. If you reduce this salary to pay pension contributions, you save twice as much tax on a company contribution as a personal one. Even on what would have been higher rate salary, a company contribution saves you an additional 12.8%.

Edit: Forgot to repeat the fact that someone has already pointed out: if you are IR35-caught then a personal contribution doesn't reduce your deemed salary, a company one does. i.e. the p in the salary/pension calculation has to be a company contribution - a personal one won't count.

[IR35 Avoider]

You are not keeping up.

A bit unfair, as the post you quoted was made before the comments about employer contributions being disallowed.

As it happens, I was fully aware of the potential problems of very large contributions - I was keeping quiet in this thread in order to keep things simple.

[pedant]Anyway, the legal position is that unlimited contributions are allowed. The company can put in £1 million if it likes. The question is how much will be allowed as an expense against corporation tax. [/pedant]

The pension rules say there is tax-relief up to £215,000. HMRC are trying to put a brake on people taking advantage of the rules by creating FUD that they will disallow pension contributions within this limit that are not wholly and exclusively for the purposes of trade. No-one knows what this means for an owner-director. If they are going to strictly enforce this rule I could argue that it means we can never pay ourselves any salary or pension contribution at all. As I get all the profits from my company, I wouldn't work any less hard if it completely failed to remunerate me, therefore none of my salary or pension contributions should be allowed as deductions in computing corporation tax. (For the purposes of this argument I'm assuming not IR35-caught.)

Any employer contributions to a company pension at 100% or more of the actual salary paid in that year are likely to be disallowed

Unless I've missed some very recent announcement, "likely to be disallowed" is to strong - we simply don't know at this stage. I agree amounts up to 100% should be safe.

An employer contribution requires authorisation from the IR

The word "authorised" implies you get permission - I think it's a bit misleading. It would be very nice if they told you in advance what they will let you contribute, but it's news to me if they've said they will do this. I understood that what would happen is that, as with any company expense, you pay whatever you think is right, and a year or two later when they read your corporation tax return they arbitrarily disallow anything they are not happy with.