Treatment of payments

Treatment of payments

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I would be grateful if someone could offer some help and guidance on a monthly settlement amount. This relates to a partnership to whom have agreed a settlement of £275.00 per week to a person who worked within the organisation and will be paid until her death or if and when the business ceases to trade. The person is not a partner in the business but previously used to pay themselves through drawings?? very strange. I was wondering if these payments of £275.00 are allowable for tax deduction. This settlement is not a redundancy payment as you are allowed up to £30k without paying tax  it is an agreed some of money spread over numerous years dependent on mortality or the company ceasing to trade. The person receiving the funds will be responsible for their own tax and NI contributions. Thank you

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By johngroganjga
07th Sep 2013 14:11

So it's an unfunded annuity?

The individual in question formerly receiving payment through drawings is more than strange - it does not make sense. What was the nature of the credits to the account out of which the drawings were taken?

If the individual in question was an employee of the business (which is not yet clear) the annuity payments to her should, I believe, be an allowable expense for tax purposes.

PS if these are annuity payments they should be subject to PAYE.

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Replying to Briar:
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By ABPS
09th Sep 2013 15:28

Dear John, Firstly thank you for your response. I have only just one this client and started work on 1st September. My understanding is their late father who was a partner died last February 2012 and his wife used to do the bookkeeping of the business. She was never formely made a partner and the partnership went from 3 persons father and 2 sons to just the 2 sons.The bookkeeper to whom is their step mother paid herself through drawings just like a partner and was never challenged. I have now been appointed and the existing partners are now trying to come to an agreement to continue to pay her at £275.00 per week for the remainder of her life or if the business ceases to trade and she will be responsible for her own tax and NI.. As for the previous drawings they were taken from the business bank account according to the cash book but I have requested copy bank statements just to be 100% sure. I think there has been a misunderstanding since the death of the father as she seemed to think she became a partner but again I need to check out all this information with the past accountant. I just wanted to make sure that the payments to her would be a deductible expense against the business.

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By johngroganjga
09th Sep 2013 15:50

It comes down to what does "paid herself through drawings" mean?  I asked what was the nature of the credits made to the account to which the "drawings" were debited.

If she was an employee my answer is as above.

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