Quick pension query

[ratewhore]

If I pay myself a gross salary of £7000, can my Ltd make employer pension contributions of more than that?

Any links to HMRC guidance would be appreciated.

Cheers!!

[Craig@Clarity]

Yes you can. You can pay up to £50,000 and possibly more if there are unused allowances from previous tax years. Your IFA would be able to advise you if you have one. Here is some guidance on pensions from HMRC HM Revenue & Customs: Tax relief on pension contributions

[ratewhore]

Thanks Craig. My IFA checked with HMRC who wouldn't commit to an answer.

[ASB]

Yes you can. You can pay up to £50,000 and possibly more if there are unused allowances from previous tax years. Your IFA would be able to advise you if you have one. Here is some guidance on pensions from HMRC HM Revenue & Customs: Tax relief on pension contributions

That link though relates to personal contributions not employer contributions.

Corporate contributions still need to pass the "wholly and exclusively" test in order to get a CT deduction. My personal view is that a controlling director with large contributions will not fail - the overall package obviously being able to retain the individual as the driving force of the business.

My understanding of the current (post April '11) rules is:-

- The limit on the total paid in (by employer, employee and tax relief) is 50k.
- Despite the 50k limit the employee is still limited to 100% of salary (for income tax relief purposes) [Or the de minimus limit of 3,600]
- In excess of 50k paid in (whatever source) will generate a tax charge on the individual if they cannot carry the contributions to prior unused ones

So, even though a large employer contribution may gain CT relief it doesn't mean the individual won't necessarily be stuck with a tax bill on the contribution (if their total savings are > 50k and they can't use any of the carrying possibilities).

HMRC in their current guidance do give an example of how "Jeff" could get a tax bill.

HM Revenue & Customs: Examples

The thing to be careful of is to recognise that the 50k represents total contributions and the tax impact (if any) on the individual is dependant upon what else they have done.

[ratewhore]

Corporate contributions still need to pass the "wholly and exclusively" test in order to get a CT deduction.

This is what HMRC would not comment on.

Despite the 50k limit the employee is still limited to 100% of salary (for income tax relief purposes)

This is the bit I'm trying to check...

[Bradley]

BIM 46035

This is what HMRC would not comment on.

This is the bit I'm trying to check...

HMRC Business Income Manual states:

You should accept that the contributions are paid wholly & exclusively for the purposes of the trade where the remuneration package paid in respect of a director of a close company

I.e. it doesn't need to be 100% of income but can be more or less.

[ASB]

This is what HMRC would not comment on.

It's a pain. I do see their logic to some extent, since whether it is allowable for CT is dependant upon things that might yet happen in the current year.

The full wording that Bradley posted should be:-

"You should accept that the contributions are paid wholly & exclusively for the purposes of the trade where the remuneration package paid in respect of a director of a close company, or an employee who is a close relative or friend of the director or proprietor (where the business is unincorporated) is comparable with that paid to unconnected employees performing duties of similar value. When there are no employees with whom duties are genuinely comparable, you should follow the general guidance at BIM47105."

This only actually implies that it is definite acceptable if there is another employee with the same package.

BIM47105 (which strictly only applies to close relatives and dependants so it is badly phrased in the guidance above) states:-

"In this situation, you should consider whether the amount of the overall remuneration package, that is the combined salary, wages, benefits and pensions contributions, was paid wholly and exclusively for the purposes of the employer’s trade."

In terms of a controlling director in order to fail this HMRC would need to make a case that they can limit the amount of remuneration a business owner can receive. I think they would struggle with this.

You may find this eases any worries you might have:-

Employer contributions and tax relief

This is the bit I'm trying to check...

I am not quite sure why you are checking the 100% employee limit since you were referring to employer contributions (just being thorough possibly or maybe I have missed the point). However these might help:-

From Craigs link on employEE contributions:-

"Limits on tax relief
You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension from which you benefit from tax relief is subject to an 'annual allowance'. The annual allowance amounts for the current and previous two tax years are shown below."

This seems to me pretty clear for employee contributions, remember dividends don't count towards pensionable income [So in order to get the personal income to contribute it must have suffered both lots of NI and income tax first]

[Bradley]

Don't Agree

The full wording that Bradley posted should be:-

You should accept that the contributions are paid wholly & exclusively for the purposes of the trade where the remuneration package paid in respect of a director of a close company, or an employee who is a close relative or friend of the director or proprietor (where the business is unincorporated) is comparable with that paid to unconnected employees performing duties of similar value. When there are no employees with whom duties are genuinely comparable, you should follow the general guidance at BIM47105.

This only actually implies that it is definite acceptable if there is another employee with the same package.

I'm sure you didn't mean to but you're putting words in my mouth. The decision to limit the quote was deliberate as imo it was implied that the person posting the query was a controlling director.

47105 only applies to friends or relatives because it is not intended that controlling directors need to compare themselves to other employees. When you say:

BIM47105 (which strictly only applies to close relatives and dependants so it is badly phrased in the guidance above) states:-

In this situation, you should consider whether the amount of the overall remuneration package, that is the combined salary, wages, benefits and pensions contributions, was paid wholly and exclusively for the purposes of the employer’s trade.

In terms of a controlling director in order to fail this HMRC would need to make a case that they can limit the amount of remuneration a business owner can receive. I think they would struggle with this.

You are correct that 47105 does not apply to controlling directors but wrong to imply that 46035 is badly worded for that reason.

There was some additional guidance issued at the time (2006?) by HMRC that discussed all of the above. I'll see if I can dig it out.

In any event, you are correct to state that HMRC would find it hard to attack a deduction for a controlling directors pay package and its not likely to arise in practice due to the guidance at 46035. This assumes that HMRC actually read their own guidance of course!

[ratewhore]

So I think the answer is it is not a problem subject to the wholly and excusively test.

[ASB]

I'm sure you didn't mean to but you're putting words in my mouth. The decision to limit the quote was deliberate as imo it was implied that the person posting the query was a controlling director.

I certainly wasn't trying to put words into your mouth, my apologies as it appeared that way.

In my reading of the sentence the positioning of the comma makes it a bit confusing. It seems as though they might be trying to say:-

"........ where the remuneration package paid [[ in respect of a director of a close company, or an employee who is a close relative or friend of the director or proprietor (where the business is unincorporated) ]] is comparable with that paid to unconnected employees performing duties of similar value."

The clause preceding the comma feels incomplete in isolation. If it were to say ".... package is paid in respect of ...." then it would be much clearer.

You have persuaded me that you are right to take the first clause in isolation. Not doing so - due to the following sentence referring to 47105 would in fact make the entire paragraph inconsistent.

My limited knowledge is only based on my experience with my own affairs, yours is far more comprehensive and current.