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Pension contributions Corporation Tax relief

Pension contributions Corporation Tax relief

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I have a number of owner managed small company clients who want to make company contributions of several times their salaries.

Has the thorny issue of the Case 1 deduction been resolved ?

One client, on a salary of £8,000 pa, wants his company to make a pension contribution of £50,000 per annum. I have advised him to beware, but his IFA is bullish (she would be wouldn't she)

Help !
Bernard Oppenheim

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By kenmoody
07th Jun 2007 15:41

The trouble is ...
... that the rules haven't been with us for long enough to know exactly how this will pan out and I'm not aware of any test cases in the pipeline. In theory you would imagine that a sole shareholder-director should be able to justify any amount of remuneration package up to the level of the company profits. I wouldn't like to be the one to test it though, so like many I'd probably bump up over a couple of years to see what happens.

It strikes me that if the company has been in the habit of paying dividends then to now say that the director is worth £58k or whatever, rather plays into HMRCs hands if the company decides to revert to the dividend route for whatever reason. However, that's another story.

An IFA for RBS recently suggested that the board formally vote a salary of £x and the employee then does a salary sacrifice in exchange for pension or enhanced pension payments. According to the IFA, HMRC are quite happy with that, but as you say he would wouldn't he. For a small company such arrangements look a bit contrived but I wouldn't dismiss the idea. I can imagine cases where I might suggest that course on the basis that there doesn't seem to be any downside and it might help a bit - unless as I say the company wants to revert to the dividend route. If a higher remuneration package has been formally voted it may be more difficult to argue that subsequent dividends are not disguised remuneration.

HMRC have muddied the waters over this. They talk about payments not being 'wholly & exclusively' etc and so if the payments are made for the personal financial planning purposes of the director, the payments might be disallowable. However, as I recall the guidance stops short of advocating a total disallowance and suggests that splitting the payment and allowing part may be possible. I don't think that holds water myself as if the motives are mixed then there is a dual purpose, in which case none of the payment would be allowable - which would defeat the whole object of the 'simplification'. The old rules might have been a bit cumbersome in some ways but at least you knew where you were and there was no risk with an approved scheme of anything being permanently disallowed even though you might have had to spread the payment in some cases.

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By NeilW
07th Jun 2007 14:33

Package
HMRC seem to have accepted the package approach. So if the individual is worth a £58K salary package, then it will probably go through.

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