Director Pension Contributions

DairyQueen

Apologies if this has been asked before. I have searched the forum, and the web, but can't find an answer to a specific question. I am hopeful that an expert here can oblige.

Scenario:
Husband and wife are both directors and 50% shareholders of a limited company.
One spouse is the fee earner and the other undertakes all admin, finance and support tasks.
They share planning and decision-making.
The non-fee earner receives no earned income from other sources.
Would it break any tax rules if the non-fee earner received 100% of remuneration as an employer pension contribution? (i.e. no salary). If so, what would be considered a reasonable sum by HMRC?

Your help much appreciated.

Alibert

Given the division of responsibilities have you got a good reason as to why they have 50% shareholdings ?
Other than as a device to allow you to pay less tax , I mean

I understand that HMRC are seeing that set up as a red flag ...and you are drawing attention to yourselves

ex-pat_scot

Alibert wrote: »

Given the division of responsibilities have you got a good reason as to why they have 50% shareholdings ?
Other than as a device to allow you to pay less tax , I mean

I understand that HMRC are seeing that set up as a red flag ...and you are drawing attention to yourselves

Not a red flag - see Artic systems case.
Where there are red flags (and it becomes anecdotal) are where there are different share classes with different dividend structures, or where the shareholding regularly changes between spouses to then artificially generate a tax-optimal distribution.


There's nothing unusual in a company using its turnover to then reward its directors or employees, by a mix of salary, pension and dividend. It's a sensible approach.
(a practical note - if your company is making a payment into your pension, then ensure the receiving scheme knows this is a company payment and is gross ie does not attract HMRC payment).

Spreadsheetman

Worth checking that the non-fee earner does not have a contract classing them as a worker. The minimum wage legislation doesn't apply to directors, but would as a worker.


See: https://www.gov.uk/hmrc-internal-manuals/national-minimum-wage-manual/nmwm05140

Brynsam

If the non-fee earner has no earned income from other sources, have you considered paying them a salary which is high enough to trigger NI credits without actually triggering the need to pay either employer or employee NI? That would cover any need to pay minimum wage (if it applies) and keep the NI record protected.

The non-fee earner could then pay pension contributions equal to their whole salary direct to the pension provider and get a 20% uplift when the provider claims relief at source on their behalf (even if they are a non-taxpayer) and adds it to the pot. The company can claim corporation tax relief on their salary as a legitimate business expense.

Nothing to stop the employer making a further pension contribution (within normal HMRC limits) even if the non-fee earner pays in 100% of pay as a pension contribution.

kidmugsy

DairyQueen wrote: »

Scenario:
Husband and wife are both directors and 50% shareholders of a limited company.
One spouse is the fee earner and the other undertakes all admin, finance and support tasks.
They share planning and decision-making.
The non-fee earner receives no earned income from other sources.
Would it break any tax rules if the non-fee earner received 100% of remuneration as an employer pension contribution? (i.e. no salary).

I've been looking around on this lately. I've found nothing definitive, just warnings that HMRC might be browned off if the pension payment seemed disproportionate to the director's contribution to the company.

In our case my idea was to contribute £4k p.a. to my co-director's pension and nil to mine. Sherlock Holmes could probably make a good guess at our incentive structure.

So I must soon get on and decide whether to set up this company of which I speak. In an earlier company in the family the fee-earner was sole director, held 90% of the shares, was paid a salary but was credited with no pension contributions. The admin/IT bod held 10% of the shares; her income from the company came entirely from dividends. The 10% was chosen on the supposition that (i) it seemed a reasonable reward for the effort and expertise expended, and (ii) HMRC would surely not object. And they didn't.

dunstonh

Would it break any tax rules if the non-fee earner received 100% of remuneration as an employer pension contribution? (i.e. no salary). If so, what would be considered a reasonable sum by HMRC?

Why would you not have the spouse earning a salary? The idea of earning up to the primary threshold is that you qualify for NI without paying a penny of NI. i.e. state pension qualification.

So, if you don't pay the spouse a salary to the primary threshold, she doesnt build qualification for the state pension. That could be a costly mistake.

DairyQueen

Thanks for your helpful responses.

To clarify why this unorthodox approach is under consideration. More info:

- both directors will qualify for a full SP after NI already paid this tax year is credited.
- the spouse has (variable) unearned income that is subject to tax but currently below tax allowances. A salary will take-up an equivalent amount of personal allowance. It will be easier to adjust dividend income than salary to optimise tax.
- no contracts of employment so neither director is bound by NMW.
- the spouse contributes the max 2880 net p.a. pension contribution permitted for non-earners.
- the spouse is over 55 and the MPAA has not yet been triggered.
- there is no need to run payroll unless the spouse's salary exceeds the LEL NI limit because...
- the fee-earner will be in receipt of other income that uses all of his personal tax allowance. He will pay BRT and will therefore incur income tax at 20% on any (small) salary drawn from the company. A 1% tax difference on income versus corporation tax isn't worth the overhead of running payroll.

The share split was decided based on 50/50 investment. This can be changed now if there is a good reason to do so (company has only just been set up). No intention of changing share allocation once things are up and running.

That triggers a thought...

The spouse will receive around £7.2k in employer pension contributions as reasonable remuneration for work undertaken (hopefully not excessive or likely to wave flags in the direction of HMRC). There is no obvious reason why the fee-earner shouldn't receive a higher amount of dividends than the spouse. That suggests the share allocation could be higher for the fee-earner. Good point.

I believe that employer's pension contributions are paid gross and therefore the spouse would forego the opportunity to receive additional tax relief on the 7200 that would be available if it had been paid as salary (rather than just the net 2880 available for non-earners). However taking salary would limit the tax allowance available to offset against other taxable income and dividend income.

The fee-earner will receive zero pension contributions (call me Sherlock, kidmugsy ).

Paying the spouse a salary creates a potentially more complex tax situation (and need to run payroll) than can be justified by the extra pension tax relief available on salary. Ideally, the spouse would remain a non-taxpayer by taking a share of dividends only sufficient to use up tax allowances whilst the fee-earner receives a higher %age.

I think an 80/20 share split would hit the button about squarely.

The spouses will retire in approx 3 years. It is likely that some of the company's net earnings will be retained in order that dividends can continue to be received tax efficiently post retirement. The company's revenue will drop significantly from that point onward but it may not cease completely as the fee-earner may continue working a day or so each week.

Anyone spot any obvious, or not-so-obvious, clangers?