Can pension tax relief exceed tax paid?

koru

Clifford_Pope wrote: »

If the company makes employer pension contributions on behalf of a director then the salary is irrelevant.

Isn't it relevant for obtaining a CT deduction for the employer, as it must be wholly and exclusively for the purpose of the trade? If total remuneration exceeds a reasonable rate for the work done by the director, a deduction might be denied.

dunstonh

koru wrote: »

Isn't it relevant for obtaining a CT deduction for the employer, as it must be wholly and exclusively for the purpose of the trade? If total remuneration exceeds a reasonable rate for the work done by the director, a deduction might be denied.

Only if the person is not the main share holding director(s).

e.g. 1

A husband and wife where the husband is 100% shareholding director and wife is company secretary but not employment within company. She would be hit by a reduced annual allowance to what is reasonable for the role. However, the husband can go to £40k

e.g. 2
husband and wife 50% shareholding directors would allow both to go to £40k.

(ignoring carry forward and tapered allowance in those examples)

koru

dunstonh wrote: »

Only if the person is not the main share holding director(s).

e.g. 1

A husband and wife where the husband is 100% shareholding director and wife is company secretary but not employment within company. She would be hit by a reduced annual allowance to what is reasonable for the role. However, the husband can go to £40k

e.g. 2
husband and wife 50% shareholding directors would allow both to go to £40k.

(ignoring carry forward and tapered allowance in those examples)

Thanks. Why does a high enough shareholding mean that any salary meets the wholly and exclusively rule? Does this assume that the main shareholder director/s will be responsible for most of the business activity that generated the business profits, so the fair remuneration is anything up to the amount of the business profits?

koru

koru wrote: »

One more question: To do a salary/bonus sacrifice, must there be a contractual right to the salary/bonus that is sacrificed? So, must there be an employment contract giving the right to the salary or to a bonus? (A director or other company officer might not have an employment contract.)

To answer my own question, the answer seems to be no. Because a discretionary bonus (to which you have no contractual right until it is declared) can still be sacrificed. (http://adviser.royallondon.com/globalassets/docs/shared/guides/ss7-a-guide-to-salary-exchange.pdf)

dunstonh

Why does a high enough shareholding mean that any salary meets the wholly and exclusively rule?

Because the beneficial owners can effectively decide their own remuneration package for themselves as they own the company and are the driving force behind the company.

HMRC BIM47106
Controlling directors are often the driving force behind a company. Where the controlling director is also the person whose work generates the company’s income then the level of the remuneration package is a commercial decision and it is unlikely that there will be a non-trade purpose for the level of the remuneration package. It should be noted that remuneration does not include entitlement to dividends etc arising in the capacity of shareholder.


So, a shareholding director is likely to be paid only £8052 a year through salary. Dividends do not count. So, £40k into a pension is £48k a year. £48k for a shareholding director involved in decision making of the company is nothing.

koru

dunstonh wrote: »

Because the beneficial owners can effectively decide their own remuneration package for themselves as they own the company and are the driving force behind the company.

HMRC BIM47106
Controlling directors are often the driving force behind a company. Where the controlling director is also the person whose work generates the company’s income then the level of the remuneration package is a commercial decision and it is unlikely that there will be a non-trade purpose for the level of the remuneration package. It should be noted that remuneration does not include entitlement to dividends etc arising in the capacity of shareholder.

Thanks. So it isn't the shareholding in itself; it is the fact that the controlling director is the person whose work generates the company’s income. That makes sense.