This month TAXtv hosts Tim Good and Giles Mooney tackle AccountingWEB reader queries on entitlement to employment allowance and the national insurance on a SIPP payment.
To watch the full video of Good and Mooney answering readers’ questions, click here or scroll down to the bottom of the page.
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Entitlement to employment allowance
The first question comes from AccountingWEB reader MILLY1, who asks:
“If a partnership converts into a limited company, is it entitled to a second hit of employment allowance? HMRC guidance appears to refer only to a balance of the partnership claim. Only change in staff is that the partners become salaried staff.”
Effectively the question, according to Giles Mooney, is ‘if we change our structure halfway through a year can I get a second £3,000?’
“Probably not,” was Tim Good’s reply, “but like everything else in tax in national insurance it all depends.”
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“Let’s suppose there’s an incorporation on 1 of January 2018,” Good continued. “For the 2017/18 tax year, the unincorporated business has claimed the full amount of £3,000. It’s a limited company from 1 January 2018 – can that limited company claim employment allowance for 2017/18?”
The legislation in the national insurance contributions act of 2014 states that if a business, or part of a business, is transferred to a person (“P”) in a tax year, then liabilities to pay secondary Class 1 (the Class 1 secondary against which the employment allowance is set) will be excluded, so the business won’t be able to set the employment allowance against it if it’s incurred in respect of an employed earner who is employed wholly or partly for purposes connected with the transferred business.
“So if all the employees in the limited company post-incorporation are performing duties connected with the transferred business,” said Good, “whether they are old or new employees, or the previous owners of the unincorporated business who become directors and employees of the limited company, in each of those scenarios although the limited company is entitled to a full £3,000, it won’t be able to use it because all of the secondary will be an excluded liability.”
Good went on to point out that if the newly incorporated limited company were to carry on a different business alongside the transferred business, then the secondary liabilities of employees involved in this separate business would be non-excluded and the business could get the employment allowance there.
Mooney also went on to provide a real-life example of when such a situation occurred – see around 4m15 into the video for further details.
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Employer contribution to SIPP: National Insurance
The second and final question covered by Mooney and Good came from Ltd_Dir, who asked:
“I am a sole director of a Ltd company. My remuneration is not fixed but defined as a bonus depending on the company's profit. The condition for receiving the bonus is that all of it will be contributed to my SIPP. The company makes a pre-tax profit of £500k, hence I receive a bonus of £500k paid into my SIPP by the company.
“Does the company have to pay National Insurance on this payment? If not, it means it is a perfect solution for reducing the corporation tax to zero.
“Also, I understand that the annual allowance for pension contributions will not be exceeded here as it is not more than 100% of my earnings. Therefore, no charge will be applied to this contribution. Is that correct?”
Mooney clarified that he believes the questioner’s company will be making the payment into the pension, rather than the individual.
Good went straight to the final point made in the question and stated that this was not correct.
“The questioner is wrong to think they can get tax relief on more than £40,000 year,” said Good. “The annual allowance is £40,000, and that applies to all defined contributions and accrued benefits in defined benefit schemes. Although it is possible to use brought-forward unused relief from the previous three tax years, disregarding that, nobody’s going to be able to get tax relief on more than that £40,000.”
According to Good, the error in the question is in thinking that because it is an employer contribution you can get more than the annual allowance.
“That £40,000 figure is restricted if your income goes over £150,000,” said Good. “And for the purposes of the tapering down to £10,000 of the annual allowance of £40,000, the employer contributions are treated in a different way from your own contributions.”
Good went on to suggest that there is a benefit in the arrangement suggested, but nothing like as much as the questioner might think.
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About Tom Herbert
Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.