Company pension deduction question

[chrisl]

Limited company with two shareholders 50:50.

Say for example, company profit left to pay out in a certain month is £10k so each shareholder gets £5k each.

Now the first shareholder does not want to take a dividend but wants his £5k put into a pension, the second shareholder wants her dividend.

My question is, does the pension deduction of £5k have to come out before pre-tax profits for both of them, so there dividends are in effect £2.5k each, or can literally the pension be set off against just one persons dividend.

Due to a 50:50 holding, I am not sure if it is possible for one shareholder to pay his money into a pension whilst keeping the dividend of £5k constant for the second person. Or whether the pension always has to come out of pre-tax profits which effects both shareholders final distribution?

Hope that makes sense?

[Clare@InTouch]

The pension contribution will reduce the profits, thus reducing the amount available to pay out as a dividend in total.

You can pay a different dividend amount to each shareholder by using a dividend waiver - one person waives their right to the dividend. If you do this though you should ensure that there are sufficient profits to cover the full amount as if each shareholder had taken their due, so if you want £5,000 then there should be profits of at least £10,000. Also keep in mind that dividend waivers are something HMRC state can be a risk factor for investigation under the old Section 660a (income shifting).

[northernladuk]

The pension contribution will reduce the profits, thus reducing the amount available to pay out as a dividend in total.

You can pay a different dividend amount to each shareholder by using a dividend waiver - one person waives their right to the dividend. If you do this though you should ensure that there are sufficient profits to cover the full amount as if each shareholder had taken their due, so if you want £5,000 then there should be profits of at least £10,000. Also keep in mind that dividend waivers are something HMRC state can be a risk factor for investigation under the old Section 660a (income shifting).

I thought waivers were a big no no, not just a quick sentence at the bottom of a possible solution? Just thought it should be put in to perspective?

Who is the main earner in this setup? If it is you and the other shareholder is supplying nothing more than a taxbreak with minimal input tell her to go bloody whistle and be thankful for everything she had so far. If it isn't just ignore that bit.

[Clare@InTouch]

I thought waivers were a big no no, not just a quick sentence at the bottom of a possible solution? Just thought it should be put in to perspective?

Who is the main earner in this setup? If it is you and the other shareholder is supplying nothing more than a taxbreak with minimal input tell her to go bloody whistle and be thankful for everything she had so far. If it isn't just ignore that bit.

It depends on how the dividend waiver is handled, HMRC have guidance under what circumstances they'd deem it to be a settlement:

You should look out for the following factors, which would indicate that the Settlements legislation is likely to apply.

The level of retained profits, including the retained profits of subsidiary companies, is insufficient to allow the same rate of dividend to be paid on all issued share capital.
Although there are sufficient retained profits to pay the same rate of dividend per share for the year in question, there has been a succession of waivers over several years where the total dividends payable in the absence of the waivers exceed accumulated realised profits.
There is any other evidence, which suggests that the same rate would not have been paid on all the issued shares in the absence of the waiver.
The non-waiving shareholders are persons whom the waiving shareholder can reasonably be regarded as wishing to benefit by the waiver.
The non-waiving shareholder would pay less tax on the dividend than the waiving shareholder.

TSEM4225 - Dividend waiver - when Settlements legislation may apply

[northernladuk]

I appreciate there are rules when it hits you, there are arguments about how to get out of it, what will happen etc but my outlook on this is to not get in to that level of a problem...

My outlook is more to avoid any of this regardless if I have 100% chance to get away scott free.

I was of the understanding from other threads that a dividend waiver was like a red flag to a bull and an invite for HMRC to have go and to be avoided at all costs for an easy life.

From the advice you gave is it worth doing this for 5k balance against him attracting trouble?

[Clare@InTouch]

I appreciate there are rules when it hits you, there are arguments about how to get out of it, what will happen etc but my outlook on this is to not get in to that level of a problem...

My outlook is more to avoid any of this regardless if I have 100% chance to get away scott free.

I was of the understanding from other threads that a dividend waiver was like a red flag to a bull and an invite for HMRC to have go and to be avoided at all costs for an easy life.

From the advice you gave is it worth doing this for 5k balance against him attracting trouble?

If someone wants to do it then fine, but I personally wouldn't recommend it. It depends on a persons attitude to risk.

[Greg@CapitalCity]

My question is, does the pension deduction of £5k have to come out before pre-tax profits for both of them, so there dividends are in effect £2.5k each, or can literally the pension be set off against just one persons dividend.

Have you thought about creating two classes of share? You could for example convert your shares to Ordinary A shares, and the second shareholder to Ordinary B shares. When different share classes are created a company may vote dividends at different rates on each separate class of class. So you could for example vote £5,000 in dividends for the Ordinary B shareholder, and pay no dividend to the Ordinary A shareholder.