Cash Accounting with Pension Deductions

RD88

Hi Everyone, long time browser first time poster. I'm unsure whether this should go in the tax or the pensions section so please move this if I've put it in the wrong place. Any help is appreciated. Quick bit of background first.



My other half is employed in the film and television industry. He is self employed but on many of his longer engagements he is classed as a 'worker' It's a bit unusual, but it's a bit of a grey area between tax and employment law. He is classed as self employed for tax purposes and completes a self assessment for his trading income, however the studio he works for does give him holiday pay and also deducts and contributes to a pension for him. He invoices a gross amount and the pension is the only deduction made (no tax,student loan, NI) He does receive 20% tax relief as the government also contributes 20% of his deductions to the pension provider, which we see when we log onto the pension account.



The reason this starts to get a bit complicated is that for his self employed income he does cash accounting. (everything has always been relatively simple and as he is under the threshold there has been no need to do it on an accruals) For the 18/19 tax year he is also a higher rate tax payer. Meaning that we will need to extend his basic rate band to obtain the additional tax relief on his contributions.



What I'm struggling is to understand is whether I should be recording his turnover net of the pension deductions (this would be in line with cash accounting where you only declare what you actually receive) This would effectively give him the additional tax relief automatically. Or whether I should be declaring the gross amount he has invoiced and then include the pension contribution in the pension tax reliefs section of his self assessment to obtain the relief that way.


Apologies for the wordy query, I just wanted to give a reasonable amount of information. Just to clarify I am an ACCA qualified accountant, however I have always worked in Industry rather than practice and it was some time ago since I sat my tax papers, which didn't go into more industry specific scenarios like this. I have contacted a few of my friends in practice and they don't seem to follow that he is self employed but also getting a pension from the studio. We are based in the countryside rather than London and he works remotely/travels, so I imagine maybe Film and TV work is isn't a common industry for them so aren't aware of this type of thing.



I've had a look on hmrc's website for guidance and on the sa150 notes accompanying last years paper form it does state on Page TRG 9 not to include 'contributions taken from you pay before it was taxed' suggesting that the first way I mentioned above would be correct. But then I may be misunderstanding and this is instead talking just about salary sacrifice for employees.


Any feedback appreciated, and thank you for reading.

Pennywise

You need to declare gross and then put the pension deductions in the relevant section of the tax return.

RD88

ok, so as you normally would then if he were a normal employee? the fact he is self employed doing cash accounting and also that it has been deducted from his pay before it has been taxed doesn't change this?

Dazed_and_confused

If you mean "net pay" arrangement then pretty sure you cannot include that on a Self Assessment return as the maximum possible tax relief has already been received.

Sibbers123

His income is the cash payment received and any payments in kind (such as pension contributions) - otherwise, it would be particularly easy to avoid tax.

Basic rate tax relief is given at source, any higher rate tax relief will be given by increasing the tax bands.

Off Topic: Cash basis of accounting (direct tax) is okay for its simplicity, but it can be very un-beneficial in certain circumstances.

RD88

Hi Dazed and confused.



It is 'like' a net pay arrangement yes, however he is not at employee (I'm not sure whether this matters, and this may be where I'm getting a bit hung up) This pension is the only deduction they have made (no tax, NI, student loan etc) basically an example, just getting one to hand...



He sent in an invoice for say £3,000
a week later he received £2,939.14 into his bank as payment.
He also received a statement from the Studio advising they had deducted £60.86 and also made their own contribution of £50.72
If you log onto his pension account you can see he has also received a 'tax relief' payment from the government for £15.21 (£60.86 * (100/80)) - £60.86)


He now needs to include this invoice in his self assessment. Does he include the amount of £3,000 or £2,939.14 (bearing in mind he is on the cash accounting basis rather than the traditional)


My confusion here is that although this has been deducted prior to tax like a net pay arrangement, he has also received the 20% from the government in his pension account making it more like a relief at source arrangement.



As he's a higher rate tax payer we need to claim the additional relief somewhere but I'm just not sure which side this falls on.


Thank you for your response.

RD88

Hi Sibbers,


Thank you for your response, this was my concern as well I want to make sure I am paying the tax correctly but can't 100% get my head around how this should be done.


So are you saying in my example above) that the Invoice value to declare is the £3,000 and then include his gross pension payments (deduction + tax relief at source) in the relevant section of the tax return to extend the basic rate band?




Re the cash accounting - You're definitely right, and in a few years we may do an adjustment and switch to accruals, honestly it was just so much easier as he has barely any expenses or fixed assets and he wanted to do it himself as much as possible.

NordicNoir

RD88 wrote: »

....He sent in an invoice for say £3,000
a week later he received £2,939.14 into his bank as payment.

The £3,000 should be credited to income and the £60.86 debited to drawings. In effect, the company is just forwarding the personal contribution to the pension company on behalf of the worker.

He also received a statement from the Studio advising they had deducted £60.86 and also made their own contribution of £50.72
If you log onto his pension account you can see he has also received a 'tax relief' payment from the government for £15.21 (£60.86 * (100/80)) - £60.86)

The gross contribution (£60.86 + £15.21) should be claimed via the tax return to get the extra tax relief.

He now needs to include this invoice in his self assessment. Does he include the amount of £3,000 or £2,939.14 (bearing in mind he is on the cash accounting basis rather than the traditional)

I think that the cash accounting part is confusing you. Just because you receive a certain amount, it does not make that amount the 'correct' amount to declare for cash accounting. It is that amount as the company had deducted a personal liability of the worker from the amount that they paid. If they had just sent the £3,000 you would know how to handle it!...

Please see my thoughts above.

RD88

Indeed I think after talking it out with a couple of you on this thread it is all so much clearer now and I was getting a bit bogged down on the whole cash paid thing!



Of course I can't use the reduced 'paid' amount as his top line revenue as then he wouldn't be paying tax, SL and NI on the deducted amount. so I want to include it all and the as you've suggested include the gross deductions for the tax reliefs later on in the return.



Thank you also Michelle for the accounting entries which very much jogged my brain.