Employer pension contribution - treatment in accts

Accounting treatment of excessive employer pension contribution

Didn't find your answer?

Is an employer pension contribution, that will probably be deemed to be excessive if challenged by HMRC, and therefore not wholly & exclusively for the purposes of the limited company's trade, automatically treated as a director's loan account transaction? ... or can it simply just be added back in the tax comp?

Scenario: Ltd company, H&W both directors and equal shareholders. Company paid employer contribution of £40K to wife, who has minimal input, and draws a small salary <£10K.

I am anticipating a difficult conversation with my client, and would like the certainty of the answer to this question, which I am struggling to find.

Replies (63)

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By johngroganjga
19th Feb 2024 15:03

A pension contribution is still a pension contribution even if it exceeds the limit for it to be tax deductible, so that is how it should be accounted for. Any disallowance for tax purposes is a matter for the tax computation.

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Replying to johngroganjga:
By Ruddles
19th Feb 2024 15:14

Agreed. Plus the following:

Realistically, what are the chances of HMRC challenging a pension contribution of £40K?

I'd be interested to know how the OP proposes quantifying the excess element of the contribution.

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Replying to Ruddles:
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By ladymoth
19th Feb 2024 15:26

Well, he's just about to pay another £60K into her pot via the company, so that the Accounts will in fact show £100K in total for one tax year. I have a feeling this is likely to become the norm....

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Replying to ladymoth:
By Ruddles
19th Feb 2024 15:43

If £100k becomes the norm, there will be more to worry about than non-deductibility for CT purposes ...

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Replying to Ruddles:
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By ladymoth
19th Feb 2024 15:49

The £40K was paid on 3rd April - 31st March year end.
So, unfortunately, it will show £100K in the current accounting period.
I anticipate an intention to make significant regular employer pension contributions, within the limits.

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Replying to Ruddles:
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By ladymoth
19th Feb 2024 15:30

"I'd be interested to know how the OP proposes quantifying the excess element of the contribution."

Presumably, by attempting to quantify how much would be commensurate with the duties undertaken at the rate payable on an arm's length basis...

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Replying to johngroganjga:
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By ladymoth
19th Feb 2024 15:23

Many thanks John.
It just seems a bit too easy to access significant company funds in this way, to get the not insignificant benefit of an extra £40k in her pension pot, with the only 'cost' being a loss of CT relief at 25%. Hence why I imagined that HMRC would expect an adjustment for an overdrawn Director's Loan Account - I would be very grateful for your further thoughts...

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Replying to ladymoth:
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By David Ex
19th Feb 2024 15:51

ladymoth wrote:

Hence why I imagined that HMRC would expect an adjustment for an overdrawn Director's Loan Account - I would be very grateful for your further thoughts...

A company expense is a company expense. HMRC have no authority whatsoever over what goes in the statutory accounts.

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Replying to David Ex:
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By ladymoth
19th Feb 2024 16:03

So, what's to stop a high earning individual diverting their potential income into their wife's pension pot in this way...? i.e. they earn earn all the money. I'm concerned about a potential revision of the Accounts by HMRC re an overdrawn Director's Loan, and all its consequences - perhaps I'm not explaining myself sufficiently well...it seems to me to be a fundamental problem.

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Replying to ladymoth:
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By David Ex
19th Feb 2024 16:12

ladymoth wrote:

So, what's to stop a high earning individual diverting their potential income into their wife's pension pot in this way...? i.e. they earn earn all the money. I'm concerned about a potential revision of the Accounts by HMRC re an overdrawn Director's Loan, and all its consequences - perhaps I'm not explaining myself sufficiently well...it seems to me to be a fundamental problem.

HMRC’s “remedy” for any expense they regard as not wholly and exclusively for the purposes is to not allow tax relief. What benefit would they gain if they were, instead, permitted to restate the accounts?

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Replying to David Ex:
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By ladymoth
19th Feb 2024 16:14

All the potential consequences of an overdrawn loan account.

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Replying to ladymoth:
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By David Ex
19th Feb 2024 16:26

ladymoth wrote:

All the potential consequences of an overdrawn loan account.

If you can produce any evidence of that ever having happened or of HMRC’s authority to restate accounts in that manner, I’ll issue a full apology and pay £1 to a charity of your choosing.

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Replying to David Ex:
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By ladymoth
19th Feb 2024 16:35

Well, clearly I can't - that's why I'm asking this question...

I realise that 3 people have now answered it, but I am still struggling to accept their replies - it just seems too good to be true that an individual can set up a company, earn significant profits, and extract £100K's tax free by paying it all into their spouse's pension pot, with the only consequence being that they do not get CT relief on any of it. But that seems to be what you are all saying. I can't help but think there's more to it than that....
I'll just have to start selling this advice to all my 45% tax-paying directors....I think they'll be loving it.

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Replying to ladymoth:
By Ruddles
19th Feb 2024 17:00

ladymoth wrote:
Well, clearly I can't

Does the fact that you can't not suggest something to you?
ladymoth wrote:

I realise that 3 people have now answered it, but I am still struggling to accept their replies

Why bother asking the question then?
ladymoth wrote:

- it just seems too good to be true that an individual can set up a company, earn significant profits, and extract £100K's tax free by paying it all into their spouse's pension pot, with the only consequence being that they do not get CT relief on any of it.

It's not exactly tax-free, though, is it?
ladymoth wrote:

I can't help but think there's more to it than that....

There isn't
ladymoth wrote:
I'll just have to start selling this advice to all my 45% tax-paying directors....I think they'll be loving it.

I can't think of many of my clients that would thank me for advising their company to spend money for which they'll get no tax relief but which will be taxed when paid out.

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Replying to ladymoth:
By Ruddles
19th Feb 2024 16:01

You should read BIM46035:

A pension contribution by an employer to a registered pension scheme in respect of any director or employee will be an allowable expense unless there is a non-trade purpose for the payment.

...

Whether there was a non-trade purpose for the payment will depend upon the facts of the individual case. ... where there is a non-trade purpose for the payment, then the payment is disallowable, but you should not read more into it than that.

Look at it another way. If the wife was being paid a salary, subject to PAYE but clearly excessive in the context of her duties, would you consider taking the excess amount to the DLA? If not, why not? (The fact that salary is taxable but pension contributions are not is neither here nor there.)

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Replying to Ruddles:
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By ladymoth
19th Feb 2024 16:06

I have read 46035...
I think that salary is significantly different to a pension contribution - salary attracts income tax and ee's an er's NIC.

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Replying to ladymoth:
By Ruddles
19th Feb 2024 16:54

Think what you want then. The principle is that if expenditure [of the company] is not incurred wholly and exclusively for the purposes of its business some or all of it is not deductible for corporation tax purposes. That is the end of it. The tax treatment in the recipient's hands is of no relevance whatsoever.

You appear to be trying to impute a treatment based on your own interpretation of what is fair or not. Approaching tax like that is likely to end in tears.

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Replying to Ruddles:
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By ladymoth
19th Feb 2024 17:06

You appear to be trying to impute a treatment based on your own interpretation of what is fair or not. Approaching tax like that is likely to end in tears.

[/quote]

Not at all, I just want to give the correct advice.

Perhaps my mention of Director's Loan adjustments had diverted us in the wrong direction - I am concerned that HMRC may be able to apply settlement legislation to say that the pension contribution attributed to the wife should be taxed on the husband, since he earns all the money generated by the company, and she does very little, so is only being paid a generous pension contribution by virtue of being his wife.

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Replying to ladymoth:
By Ruddles
19th Feb 2024 17:18

I would say that it was more than just a mention of DLA.

Re settlements, though:

1) What tax do you think is being avoided by making a pension contribution on which corporation tax relief may be denied?

2) Have you read ITTOIA 2005 s627?

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Replying to ladymoth:
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By Bobbo
19th Feb 2024 16:27

ladymoth wrote:

It just seems a bit too easy to access significant company funds in this way,

Wait until you hear about the BIK rates on an electric vehicle!

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By Tax Dragon
19th Feb 2024 17:25

I agree with John - the initial response.

One question that hasn't been asked above is whether husband is making a settlement in favour of wife, and might her pension potentially be taxable on him?

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Replying to Tax Dragon:
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By Tax Dragon
19th Feb 2024 17:26

.oO Is that two questions? I never know.

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Replying to Tax Dragon:
By Ruddles
19th Feb 2024 17:27

I think that you'll find that the question has in fact been asked (and answered - although not necessarily correctly ;¬))

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Replying to Ruddles:
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By ladymoth
19th Feb 2024 18:00

Thank you.
I am looking at the legislation you have referenced now...

I suppose I had thought I had given sufficient detail in my question, and subsequent responses, for this aspect to be inferred and picked up by a responder, as Tax Dragon eventually did, based on my previous experience with Aweb. It's difficult when one has a concern, but is not quite sure of the precise question to ask...

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Replying to ladymoth:
By Ruddles
19th Feb 2024 18:27

You asked whether excess contributions should be taken to DLA or simply disallowed for CT purposes. Why you would think that anyone would infer that you had settlements in mind (kudos to TD for picking it up) is beyond me.

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Replying to Tax Dragon:
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By FactChecker
19th Feb 2024 17:36

To be marginally fair to OP, that very point (or rather inference) has been belatedly raised shortly before your post ... see 'By ladymoth - 19th Feb 2024 17:06'

EDIT: how does Ruddles do that ... I blinked, typed (slowly) and find that I look like a lazy laggard once again!

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Replying to FactChecker:
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By Tax Dragon
19th Feb 2024 21:54

FactChecker wrote:

I look like a lazy laggard once again!

You and me both. In my case justifiably so - I was too lazy to read the whole thread before I posted.

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By Matrix
20th Feb 2024 07:46

Yes it does seem to be a low cost profit extraction method.

Why no BIK though?

Say there was an employed son on a low salary commensurate with his duties who was also offered a £40k employer pension contribution but asked the employer to pay his Uni fees for a few years instead. Then you wouldn’t just add them back in the tax comp.

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Replying to Matrix:
By Ruddles
20th Feb 2024 09:00

Apples and oranges. Employer pension contributions are not taxable BIKs. Settlement of an employee's personal liabilities are.

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Replying to Ruddles:
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By GDavidson
21st Feb 2024 10:32

These both look like apples to me.

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Replying to GDavidson:
By Ruddles
21st Feb 2024 10:46

Then I suggest that you do some reading about the tax treatment of employer pension contributions and the tax treatment of settlement of an employee's personal liabilities.

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John Hextall
By John Hextall
21st Feb 2024 11:06

My understanding is that, as a company director, you can put 60k in a pension this year and, under the carry forward rules, can also put in anything you missed in three previous years. This can be quite a lot of money and is a very good way of extracting profits without paying CT. You do of course pay tax later when you start taking your pension so, morally, it sounds OK to me. I think it is actually responsible behaviour on the part of the 'working' director to provide for his partner in this way and you would be unwise to challenge it. The point at which CT becomes due is more pertinent.

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By Andy Reeves
21st Feb 2024 15:19

Is there really a problem if the wife is a director? She is not subject to minimum wage legislation, so the low salary is not an indicator of work done.

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Replying to Andy Reeves:
By Ruddles
21st Feb 2024 16:57

Nothing to do with NMW, and everything to do with CT-deductibility.

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By ladymoth
23rd Feb 2024 14:29

Hello again.
I’m afraid I remained unconvinced by the responses I received, so decided to make use of the Tax Faculty referral service.
I have now paid a small fee for a (15 minute) telephone conversation with a consultant listed on their TAXconnect scheme to discuss this issue, so thought it worth adding to this thread, in case anyone is still interested.

Essentially, the person I spoke to has the same immediate concerns as me. i.e. that an employer pension contribution paid by the company for the benefit of W, whose input to the company is minimal, is highly problematic under basic principles, because the payment is not made for the purposes of the company’s business. He agreed that it failed the ‘wholly and exclusively’ test. He likened the ‘excessive’ pension contribution I have described as akin to any amount paid by the company for the benefit of a spouse who does very little or nothing for the company. e.g. a holiday, with no business attribution at all. Indeed, such a payment would need to be taken to the director’s loan account, and he suggested that might be the appropriate place for all or some of this pension premium, subject to a calculation of an amount that might be considered allowable as a deduction for the arm’s length value of work actually carried out by W.

He also thought that settlements legislation might be a separate, additional concern, depending on the final accounting treatment. We did not get into the specifics of ITTOIA 2005 S627(2)(c), as time was limited. I must admit, I do find this aspect troublesome...I don’t really understand why it should be specifically excepted. S627(2)(a) refers to “commercial reasons”, (b) relates to donations. Perhaps “a benefit under a relevant pension scheme” refers to an actual draw-down, as opposed to a contribution?? There’s just something incongruous about it that makes me not want to place reliance on it in this context.

(Although it should not make any difference, it may be helpful to know that W already earns circa £50K+ p.a. from her own unrelated professional self-employment. Together with the dividend income from her 50% shareholding, she is not in need of any specific financial ‘provision’ from H.)

There was a limit to the detail we could go into in such a short conversation, but ultimately, he advised that I must alert the client to these concerns. I do not see how I can allow CT relief on any of it, bearing in mind that W is already drawing a small salary, and does virtually nothing for the company. An add-back of that magnitude is not going to look good, so I will probably invite H to pay a consultant for some written advice, before he pays the additional £60K, given the sums involved on a cumulative basis.

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Replying to ladymoth:
By Ruddles
23rd Feb 2024 15:16

Whatever.

I remain firmly of the opinion that there is no need to take any of the excess to the DLA.

But go with whatever your conscience tells you.

End of.

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Replying to ladymoth:
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By Duhamel
23rd Feb 2024 16:09

With the best will in the world, this thread does read like you kept questioning it until you found someone who agreed with you.

For the record, the most I'd do with this is raise a W&E risk with the client and treat the pension contribution as deductible.

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Replying to Duhamel:
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By ladymoth
23rd Feb 2024 16:22

!?
I didn't just ask my next door neighbour - I asked a consultant on the Tax Faculty list. I didn't realise they were held in such low regard....

I have a lot of respect for responders on AccountingWEB, and value being able to use it, but surely I am allowed to dissent, as long as I explain the logic of my thinking.

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Replying to ladymoth:
Stepurhan
By stepurhan
23rd Feb 2024 16:54

ladymoth wrote:

!?
I didn't just ask my next door neighbour - I asked a consultant on the Tax Faculty list. I didn't realise they were held in such low regard....

I have a lot of respect for responders on AccountingWEB, and value being able to use it, but surely I am allowed to dissent, as long as I explain the logic of my thinking.

It isn't that the Tax Faculty list is held in low regard, though they sound very conservative in their advice. It is that, despite your protestations to the contrary, you appear to hold the responders on AccountingWeb in low regard.

When someone asks a question here, it is on the assumption that they are uncertain of their answer. If they stick to their answer, regardless of what anyone else says, that is not showing dissent. That is showing a lack of good faith in asking a question that implied you were willing to take the answers on board.

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Replying to stepurhan:
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By Tax Dragon
23rd Feb 2024 17:07

Sure, but we're forever (and correctly) telling people not to rely on what we say, so we shouldn't be too up ourselves when someone dissents.

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Replying to stepurhan:
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By ladymoth
23rd Feb 2024 17:11

I'm sorry, with respect, I must disagree. I don't believe I am obliged to agree with any or all opinions on this forum. I have a genuine question, and I'm not sure how to deal with it. As people respond, I reconsider the position in the light of that new information, and I may revise my thinking, or I may not. Surely that is the purpose - for people to air views on tricky issues that don't necessarily have easy/obvious answers. I notice that quite a lot of people have viewed this question, so perhaps they are all interested in the debate, though most are not putting forward a view. You say "conservative", others might be thinking that some people's opinions are somewhat cavalier - it's not for me to say, but I don't think this issue is cut and dried, and I for one am still pondering what to do, and still interested in any other opinions that may be forthcoming on this topic.

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Replying to ladymoth:
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By Bobbo
23rd Feb 2024 17:57

As someone lurking but yet to express a view, I disagree with your view and that of the consultant you spoke to.

The company made an employer contribution to the pension scheme. The company does not require the director to reimburse it for the contribution so why would it be allocated to that director's loan account?

I also disagree with the following:

ladymoth wrote:

Hello again.
He likened the ‘excessive’ pension contribution I have described as akin to any amount paid by the company for the benefit of a spouse who does very little or nothing for the company. e.g. a holiday, with no business attribution at all. Indeed, such a payment would need to be taken to the director’s loan account

If the company has purchased a holiday for its director, unless the director has breached their powers as a director in directing the company to purchase this holiday for them why would that director be required to repay the company for it?

Surely the proper treatment would be for the purchase of the holiday to be considered a benefit-in-kind provided to the director with the ensuing P11d obligations? Whether the cost qualifies for CT relief would of course depend on whether it was W&E for the trade, which if no work is done for the company is unlikely.
[See of course debate as to what is reasonable remuneration for simply being a director of a company but taking no involvement in the business.]

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Replying to Bobbo:
By Ruddles
23rd Feb 2024 18:29

Good analysis. Reminds me of the confusion that does crop up on the interaction (or lack thereof) of P11Ds and deductibility of expenditure.

I am often having to remind folks that disallowing something for CT doesn’t automatically avoid a BIK charge. Just as treating something as a BIK doesn’t automatically make it CT-deductible.

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Replying to Ruddles:
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By Tax Dragon
23rd Feb 2024 19:14

I too agree Bobbo's analysis.

It doesn't seem miles away.from what John said in reply #1, with which I have already agreed.

I would add that there's a latent issue with putting everything to DLA (quite apart from Bobbo's point) - the making good time limit of 6 July. Also of course risk of making DLA overdrawn, creating another BIK.

Bit late to bring this up, but I think I remember Richard talking elsewhere about an excessive pension contribution being treated as a distribution.

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Replying to ladymoth:
By Ruddles
23rd Feb 2024 17:06

I don't envy your position. On the one hand you have received fairly consistent advice from a number of tax professionals, but about whom, and whose expertise, you know precious little. On the other hand you have conflicting advice from one person, on whose advice you could be expected to rely.

FWIW I think he is wrong. To apply his (and your) logic if the company were to pay a salary, subject to PAYE/NI, to an individual that has done no work whatsoever for the company, you would find yourself compelled to take the gross salary payment to DLA (rather than just disallowing it under W&E principles). As I said earlier, the fact that the salary is subject to tax and NI is neither here nor there - if you apply the principle that a payment that has no connection with the business must be applied to the DLA then it must apply to all such payments, regardless of the tax treatment in the recipient's hands.

I will end by repeating HMRC's excellent advice (after all, it is they that you are going to have a fight with):

"where there is a non-trade purpose for the payment, then the payment is disallowable, but you should not read more into it than that."

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Replying to Ruddles:
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By ladymoth
25th Feb 2024 18:38

Thank you very much for all your time, and considered opinion.
You referenced the following quote from BIM46035, and I thought I would explain my current reservations.
"where there is a non-trade purpose for the payment, then the payment is disallowable, but you should not read more into it than that."

I find that despite the temptation to rely on this, I don’t really know what the end of that sentence actually refers to…it seems to be potentially very broad-based – there are many things one might read into it – can I just ignore them all?

It obviously relates specifically to the case of Dracup v Dakin, which “was decided on its own particular facts.”
But do those particular facts also relate to the circumstances of my particular scenario? – I don’t know, and BIM37745 does not really help me.

Therefore, my feeling is that I cannot be sure that the words “but you should not read more into it than that” are actually absolving me of anything/everything else that I ought perhaps to consider.

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By Tax Dragon
23rd Feb 2024 22:38

My post above at 19:14.

I think I was thinking of Richard's comment here: https://www.accountingweb.co.uk/any-answers/company-pension-contribution...

Different scenario, and the quote not quite as I remembered, but I presume "benefit [of] the company" translates W&E, which is common ground.

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By taxdigital
25th Feb 2024 13:47

OP in my view has done the right thing by seeking the members’ views whilst holding on to their own view on the matter. This, I think, should how this forum be used; with OPs actively participating in the discussions.

As for the question, the W&E part of it being clear, I’m going to concentrate on the other points:

For a start, s.196 FA 2004 is clear - an employer is entitled to relief in respect of contributions paid by the employer under a registered pension scheme in respect of any individual. Heading straight to s.308 ITEPA, again it’s clear: the contribution is squarely out of the ITEPA provisions. Now. looking at the other possible implications:

Loans to participators

S.455 – The company is a close company and W being a participator s.455 CTA 2010 is in point. It applies where a close company MAKES a loan or advance TO either an individual participator, certain trustees of a settlement or certain partnerships (LLPs included). The close company in this case made no such direct loan or advance. In fact, it was a pension contribution made to a third party on behalf of the director.

S.459 – Of course, for a loan charge under these provisions to apply a loan or advance needn’t necessarily be paid directly to a participator: it could also apply to certain arrangements (s.459) involving another person. However, the second limb of s.459 being absent here, we may safely take this section out of the equation.

S.460 needn’t be looked at as it applies to payments made by another close company which, again, is not the case here.

S.464A – That leaves us with s.464A which could be invoked if there are tax arrangements conferring benefits on a participator or an associate of the participator. Whilst ‘tax advantage’ is very widely defined, HMRC believe, this TAAR should bite only ‘where any money/value actually ends up in the hands of the participator/associate (CTM61580). W hasn’t received anything in her hands, and the excess contribution has been duly added back for CT purposes, So, I would think that it shouldn’t be too difficult for the company to prove there was no avoidance motive (of the type expected of s.464A) here. Looking at the legislative history, this provision originally targeted (FA 2013) certain arrangements involving partnerships.

Distribution

Whilst HMRC in their wisdom (CTM60670) do expand the definition of ‘distribution’ to include excess pension contribution made by a company on behalf of a participator, at CTM60600 they also say it doesn’t apply where the payment is made for the benefit of a director. However, in saying that, looks like HMRC have in mind a director who isn’t a participator. In my view where a director doubles up as a participator as well, meticulous paperwork is the key as seen in a number of s.415 ITTOIA cases. Take for example Stewart Fraser Ltd v HMRC [2011] UKFTT 46 (TC) which was won by HMRC on the basis of inadequate paperwork in the form of shareholder resolutions. The paperwork issue notwithstanding, an attack from HMRC cannot be ruled out, treating the excess contribution as a distribution (CTM60680).

Settlement legislation

Company decisions are taken collectively, and majority decisions prevail. Where there are two director shareholders of H & W with equal equity interests, and if H says Yes and W says No, nothing will move. In this case W has 50% rights over the assets and the income as well. The century old settlement legislation bites typically where there is an artificial transfer of income to a close relative (settlor-interested trust) with a view to saving on tax. How is it that H saying Yes to the company contributing to the pension (however excessive) can be seen as divesting himself (settlement) of the income and in the end paying less tax? Particularly where H & W each transfer an equal amount to the pension pot. Neither do I see a bounty element in H simply saying Yes to a resolution authorising payment of this contribution to W who is already a 50% owner and a director. As for the fundamental question of H, the sole earner, settling 50% of the company ownership in favour of wife, Jones v Garnett has been done to death all over the internet. If at all it bites then it’s an existential question, not a question of the excess pension contribution alone!

So, in conclusion, I’m inclined to agree with the other respondents except for the potential to be treated as distribution by HMRC.

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Replying to taxdigital:
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By ladymoth
25th Feb 2024 17:44

Thank you so much – I am very grateful for such in depth analysis, copious reference points from first principles, and case law.

I am reviewing your opinion in detail.

Your point in the pen-ultimate paragraph draws my initial attention;
“How is it that H saying Yes to the company contributing to the pension (however excessive) can be seen as divesting himself (settlement) of the income and in the end paying less tax? Particularly where H & W each transfer an equal amount to the pension pot. Neither do I see a bounty element in H simply saying Yes to a resolution authorising payment of this contribution to W who is already a 50% owner and a director.”

This aspect is what most concerns me – H draws nothing but dividends from the company, since his earnings from employment outside the company, and the associated pension input amounts, are too high to make any other extraction method a tax effective option for him. Therefore, I am worried that this scenario might be seen to be doing exactly that. i.e. “divesting himself of income and in the end paying less tax”.

To be clear - I am saying the company pays no employer pension contributions for H's benefit - only for W's benefit.

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Replying to ladymoth:
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By taxdigital
25th Feb 2024 20:01

Well, the point is H isn’t a controlling director. It’s a 50:50 arrangement where on his own he can’t do anything. Hence my point that there is no settlement.

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