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Large pension contributions and the w & e test

Large pension contributions and the wholly and exclusively test

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I have a one man limited company client who has now decided he wants to make some large pension contributions (I have advised him to do this in the past but he decided not to!).

The Company profits for the years to July 2016, July 2017 and July 2018 (after approx 8,000 standard Director salary were approx 150,000 each year.

He took 91,000 in dividends each year.

The company had approx 150,000 in cash in July 2018; that is nearer to 200,000 now.

He wants to make a very large contribution before April 5th and the IFA is concerned as to whether the overall package will  meet the wholly & exclusively for the business test. The IFA has advised that the client has unused annual allowances that can be used and has suggested an 80,000 company contribution before April 5th to use this years annual pension allowance and the 15/16 annual pension allowance.

Would the client then be able to make another 80,000 contribution in March next year to use up the 19/20 allowance and the unused 16/17 allowance and finally another 80,000 in March 2021 to use up the 20/21 allowance and the unusued 17/18 allowance.

Can the allowances be used like this?

Given that the company is a one man consultancy company and he generates all the income for that company himself are HMRC likely to challenge the w & e status of these company pension contributions? They look reasonable to me.

Are dividends taken into account by HMRC when they try to determine if a remuneration package is reasonable from a w & e perspective?

Also I have tried to work out if it is better to make company contributions or to make personal contributions . My calculations suggest a small saving by making a company contribution. With a personal contribution the tax relief is 20% (the government "top up") plus 25% tax relief on the reduced tax on dividends (the extended basic rate band reduces the tax rate from 32.5% to 7.5%) - a total of 45% tax relief. On a company contribution the tax relief is 19% (falling to 18%) plus income tax saving through foregoing dividends of 26.3% (32.5% x 81%) so 45.3% in total.

However thinking it through that comparison is irrelevant here because to make a large personal contribution my understanding is that client would have to have a much larger salary than the 8,000 a year. 

So I believe the question here is would an 80,000 pension contribution by the company be tax allowable on a w & e basis on the company tax return? I would say it looks reasonable to me. He earns all the money for the Company so why shouldn't he be paid all the money the company earns either by salary, dividend or pension contribution?

Are dividends taken into account when assessing if a remuneration package is reasonable?

 

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By Jdopus
15th Jan 2019 14:48

The IFA is worrying over nothing. If he's the sole source of all the company's income then any remuneration he decides to pay himself is reasonable.

In any case, HMRC only seem to use that particular rule to object to salaries paid to people who aren't real employees of the company for tax purposes, e.g. paying your wife a salary to get the benefit of her Basic Rate Band when she does nothing but answer the phone occassionally.

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By soundadvice
15th Jan 2019 16:42

That would be my thought too.

As a general rule for higher earners like this is a company contribution always more tax efficient than paying your self a higher salary and making a personal pension contribution? I can't see how with the national insurance charge on income how a personal contribution could ever be better.

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Replying to soundadvice:
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By Jdopus
16th Jan 2019 08:02

Yes that's always been my understanding of the general rule.

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