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Salary sacrifice into spouse's pension

Husband/Wife Co.

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In brief:  is there anything to stop a married couple sacrificing salary to their spouse's pension?

The detail:

I have client who runs a small proffesional services business, but the shares are split 51/49 with the non working spouse who has a rental property but little other income other than a token salary of £4k from the company for services as a company secretary and other minor duties.

Spouse is not a director and is prevented from being one due to the regulations of the business. 

Client already has a big pension pot due to her previous role, spouse does not.  When looking at pensions, it seems sensible for the spouse to pay into a pension or as a couple they will end up with one big pension and one tiny one on retirement vs both being basic rate tax payers.  But to award any sort of addtional salary to then sacrifice (we are talking £20-30k PA) seems tricky as the £4k is already generous for the duties performed.  

However could the working director sacrifice their salary, and make the payments into the spouses pension?  There would be no issue about the director's salary being larger for the work performed (its currently £9k).  I can see materials on line from an IFA point of view advising this is possible, but nothing from a tax angle.  I am wondering what the  "gotchas" might be, or if I have been missing a trick on what is routine planning.

Replies (12)

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By David Ex
07th Jul 2021 10:45

It’s not salary sacrifice if the company pays for the benefit of the spouse, I’d have thought.

Never read the legislation/ guidance but it was always implicitly a means of giving the employee payment in a different form not ANO getting that amount.

Would your proposal differ from someone asking for their salary to be paid to their spouse? I suspect not but someone will have a technically robust explanation.

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim42775

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By paul.benny
07th Jul 2021 16:23

Do pension contributions have to be commensurate with salary/work done? (I don't know). Surely employer could simply pay huge pension contributions for Spouse, possibly with a concomitant reduction in Husband's salary? Same impact as salary sacrifice.

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Replying to paul.benny:
By ireallyshouldknowthisbut
07th Jul 2021 16:45

My understanding is that the pensions are going to need to be salary sacrifice or there would not be the earnings available to support their eligibility....so I assumed the salary would need to be market rate which in this case cant really be the thick end of £30k for duties as a co. sec. and a a few hours a week at best of 'other stuff'.

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Replying to paul.benny:
paddle steamer
By DJKL
07th Jul 2021 17:02

No they don't, but their cost does need to be W & E for the purpose of the trade for the company to then claim relief for their cost.

As far as I am aware the company contribution does not need to be in line with the salary but is merely limited by the general £40k/£10k limits and W & E

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Replying to paul.benny:
7om
By Tom 7000
12th Jul 2021 10:38

yes, I understand they do for a related party, whole package looked at in the round

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By Mr_awol
07th Jul 2021 17:21

Im not sure - my first thought is whether a pension contribution to a spouse of a director/employee is for the benefit of the trade. Then again, if money is cycled through a spouse, normally HMRC would try and tax it on the director. I'd have to look it up i think, and even then might not know (and in all honesty i CBA as im about to hoof off and watch the football).

As an alternative, however, what about leaving the money in the pot to pay dividends - as it sounds like they may have fairly similar incomes anyway. If the client is not intending on making further pension contributions then (depending on age and eligibility etc) might they not take a lump sum, or annual sums, from their existing pot and gift that to spouse to then pay personal contributions. Yes it may trigger MPAA for client hence you need to know their future plans but they could end up putting a little into their pot and more into the spouse's pot without messing around with E'er contributions, getting an extra top-up from Rishi and also getting some HR tax relief on their current income, too.

Then any surplus income could be dumped in (tax free?) investments rather than a formal pension - or even taxable ones. Yes you're not getting the tax relief now, but potentially you may not be suffering it later either.

You knwo the ages, the numbers, and other factors so you can probably either completely dismiss that, or see benefit from it, quite quickly.

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Replying to Mr_awol:
By ireallyshouldknowthisbut
08th Jul 2021 09:03

Dividends are not really an option, they are banging on the door of £100k gross each, and they are not old enough to take drawdowns yet.

its really "let the reserves go up" or "stick in a pension". The latter is unattractive to the director as their pot is large and the spouse's is tiny hence the "move it over" plan.

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By The Dullard
08th Jul 2021 09:15

No longer works, although it used to. It's not salary sacrifice. There will be a BIK.

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Replying to The Dullard:
By ireallyshouldknowthisbut
08th Jul 2021 10:10

Do you know what stopped it?

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Replying to ireallyshouldknowthisbut:
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By The Dullard
08th Jul 2021 11:22

Yes.

Up until 2012/13 ITEPA 2003 s 308 said:

"No liability to income tax arises in respect of earnings where an employee's employer makes contributions under a registered pension scheme."

From 2013/14 onwards it says:

"No liability to income tax arises in respect of earnings where an employee's employer makes contributions under a registered pension scheme in respect of the employee."

Notice the difference?

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Replying to The Dullard:
By ireallyshouldknowthisbut
08th Jul 2021 12:32

Indeed! Much appreciated.

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By Tomazaan
12th Jul 2021 10:50

You can still make reasonable pension contributions on behalf of the company secretary - say £5,000 to £10,000 a year. Being an officer of the company brings risk and the company secretary is an officer. Have a look on Google for ranges of what company secretaries are paid.

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