Another question about directors' pensions and the "wholly and exclusively" thing

mrodent33

When HMRC uses the expression "wholly and exclusively for the purposes of trade" in relation to pension contributions made to employees or directors of limited companies, what does it in fact mean? 

It clearly cannot mean "this contribution must make profits for the company". If that were the case every contribution would fail to qualify: a contribution of, say, £10k depletes the assets of the company by (£10k minus some reduction in tax and possibly NI liabilities). It does not benefit the company's profitability in any way.

mrodent33

I have a small company and am sole director and sole owner. It was incorporated in 2003. It is only relatively recently that I started taking advantage of the company director's pension option or paying significantly into my SIPP by that means. It was already a fairly healthy size a few years ago.

I have read quite a bit about this, and have always been significantly puzzled by the "wholly and exclusively" test (i.e. to determine whether such a pension payment by the company constitutes something which HMRC finds allowable for profit and thus corporation tax calculation purposes).

So I read this 2019 post in this forum with interest. The poster, bowlhead 99, seems to know what she/he is talking about. In particular I'm trying to understand the implications of this para:

So then you'd end up with salary from two sources (existing employer plus LTD), and pension from your PAYE job, and company pension from your LTD, and perhaps some personal pension from yourself (either paid into the scheme that your PAYE job pays into or the scheme that the LTD pays into, whichever you prefer).

For context, I have lots of money in investments (some outside tax shelters) and am 64 and don't have much in the way of outgoings. Last year the company paid me only £9100 as a salary (responding to the recently introduced discrepancy between PT and ST). But it made a company director's pension contribution quite a lot bigger than that, and I "justified" that by saying that it was to mop up previous eligibility from the preceding 2 financial years, and for the record my accountant accepted this.

I have no other income (apart from investments), and have never had a proper job and thus no private pension things from (other) employers... and have never been involved with any kind of pension scheme.

I am planning (to get the company) to pay myself £9100 salary this year again (i.e. before 2026-03-31).

Does the quoted paragraph above mean that the company can "reasonably" pay a director's pension contribution of £9100 (to my SIPP) ... and then that I myself, on a personal basis, can in addition make another £9100 personal pension contribution to the SIPP?

I have no real interest in paying more than £18k into my SIPP for this financial year. But supposing I did want to, or if the answer to the above question is no: what would actually happen if the company paid, say, £12,000 into my SIPP as a director's pension contribution? Or just £10,000? Would the sums of (12000 - 9100 = 2900) or (10000 - 9100 = 900) of these then necessarily fall foul of this "wholly and exclusively" test? 

And supposing HMRC chose to analyse my company accounts at some time in the future? What would they actually then do? I presume they would say that the company had not paid enough corporation tax ... so the company would have to pay that ... but would they also be likely to impose a penalty and/or nasty interest rates on the unpaid sums?

Depending on the answer to this question, I might work out that it might be more tax efficient (and more prudent) for the company to pay me £12570 this year as a salary, and thus rack up a bit of (company) NI liability. (For the record, I already know that I have CGT liabilities and dividends, from unsheltered investments, which will push me way beyond the Personal Allowance for 25-26 even if I received no salary at all).

By the way, I have broached these sorts of questions with my accountant, but he tends to be quite evasive on the subject (!).

Marcon

mrodent33 said:

I have a small company and am sole director and sole owner. It was incorporated in 2003. It is only relatively recently that I started taking advantage of the company director's pension option or paying significantly into my SIPP by that means. It was already a fairly healthy size a few years ago.

I have read quite a bit about this, and have always been significantly puzzled by the "wholly and exclusively" test (i.e. to determine whether such a pension payment by the company constitutes something which HMRC finds allowable for profit and thus corporation tax calculation purposes).

So I read this 2019 post in this forum with interest. The poster, bowlhead 99, seems to know what she/he is talking about. In particular I'm trying to understand the implications of this para:

So then you'd end up with salary from two sources (existing employer plus LTD), and pension from your PAYE job, and company pension from your LTD, and perhaps some personal pension from yourself (either paid into the scheme that your PAYE job pays into or the scheme that the LTD pays into, whichever you prefer).

For context, I have lots of money in investments (some outside tax shelters) and am 64 and don't have much in the way of outgoings. Last year the company paid me only £9100 as a salary (responding to the recently introduced discrepancy between PT and ST). But it made a company director's pension contribution quite a lot bigger than that, and I "justified" that by saying that it was to mop up previous eligibility from the preceding 2 financial years, and for the record my accountant accepted this.

I have no other income (apart from investments), and have never had a proper job and thus no private pension things from (other) employers... and have never been involved with any kind of pension scheme.

I am planning (to get the company) to pay myself £9100 salary this year again (i.e. before 2026-03-31).

Does the quoted paragraph above mean that the company can "reasonably" pay a director's pension contribution of £9100 (to my SIPP) ... and then that I myself, on a personal basis, can in addition make another £9100 personal pension contribution to the SIPP?

I have no real interest in paying more than £18k into my SIPP for this financial year. But supposing I did want to, or if the answer to the above question is no: what would actually happen if the company paid, say, £12,000 into my SIPP as a director's pension contribution? Or just £10,000? Would the sums of (12000 - 9100 = 2900) or (10000 - 9100 = 900) of these then necessarily fall foul of this "wholly and exclusively" test? 

And supposing HMRC chose to analyse my company accounts at some time in the future? What would they actually then do? I presume they would say that the company had not paid enough corporation tax ... so the company would have to pay that ... but would they also be likely to impose a penalty and/or nasty interest rates on the unpaid sums?

Depending on the answer to this question, I might work out that it might be more tax efficient (and more prudent) for the company to pay me £12570 this year as a salary, and thus rack up a bit of (company) NI liability. (For the record, I already know that
 I have CGT liabilities and dividends, from unsheltered investments, which will push me way beyond the Personal Allowance for 25-26 even if I received no salary at all).

By the way, I have broached these sorts of questions with my accountant, but he tends to be quite evasive on the subject (!).

Hard to understand why your accountant can't give you a straight answer, but then of course we don't have all the facts and figures.

I suspect that - happily! - you are overthinking this. HMRC aren't going to get excited if a director working in their own business has a relatively modest contribution paid to their pension by their company - so if your company has profits to support the full £18K contribution (hardly an excessive amount), that would seem the logical way to go. 

This would probably make reassuring reading for you: https://techzone.aberdeenadviser.com/public/pensions/Employer-pension-contributions, especially the section headed 'Controlling Directors'.

As you'll note, HMRC tends to get interested when contributions are made for 'Connected Parties' - which doesn't apply here.

Sam_666

This kind of long post indicate need for good accountant and/or IFA.
Sounds like you need to change accountant. Proper one would have told you company pension contributions are not limited by employee earnings, but by £60k p/a.

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/employer-contributions-and-tax-relief/

poseidon1

The OP has not provide the whole picture with this post, there is a further back story indicated in the post below.

https://forums.moneysavingexpert.com/discussion/6561558/most-tax-efficient-wage-for-single-director-owner-employee-micro-company#latest

What seems to emerge  from the above post is:

1)  By the OP's own admission the accountant is only apparently  engaged to provide accounting services. Tax advice does not appear to part of the brief, so the accountant's reticence on the questions now raised, is not entirely surprising. You get what you pay for.

2) A £60k contribution to Sipp in the year of that post, was not fully funded from retained company profits, but required a significant injection of inherited monies by way of an inward director's/shareholder's loan. So  the question OP now poses with regard to current proposal would have been more appropriate to ask with regard to that more substantial contribution and circumstances that made it possible.

3) Some what concerning, is as a result of 2) above and future intended Sipp contributions  the OP then expressed the view that he doubts the company will ever be profitable going forward, and certainly unable to declare future dividends ( so no retained profits).

In view of 2)  and 3) above,  ( assuming this has not already been done ) should the company not be prioritising repaying the director's loan which enabled  the large Sipp contribution ASAP, to demonstrate its ability to do so from profits?  

I am of the view that past and intended Sipp contributions against this  background of inadequate retained company cash, warrants consulting a corporate tax specialist to review the OPs corporate activities.  Specifically with regard to the 'wholly and exclusive' tests and case law pertaining thereto and the bearing that has  on his 'source' of pension funding. In the meantime, the OP should perhaps acquaint himself with HMRC's duality of purpose consideration when applying the test - per below 

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim37007#:~:text=The legislation disallows any expenditure,that the expenditure is disallowed.

Recycling ones own personal capital to fund corporate pension contributions more than raises a skeptical eyebrow especially if the loan is never repaid. I am surprised that was not commenting on in the earlier post.

mrodent33

Hard to understand why your accountant can't give you a straight answer, but then of course we don't have all the facts and figures.

I suspect that - happily! - you are overthinking this. HMRC aren't going to get excited if a director working in their own business has a relatively modest contribution paid to their pension by their company - so if your company has profits to support the full £18K contribution (hardly an excessive amount), that would seem the logical way to go. 

This would probably make reassuring reading for you: https://techzone.aberdeenadviser.com/public/pensions/Employer-pension-contributions, especially the section headed 'Controlling Directors'.

As you'll note, HMRC tends to get interested when contributions are made for 'Connected Parties' - which doesn't apply here.

Thanks very much, that page is precisely what I'm looking for. [incidentally, it seems I can't mark your post both "interesting" and "thanks". But I want to mark it both: how unsatisfactory ]

mrodent33

poseidon1 said:

The OP has not provide the whole picture with this post, there is a further back story indicated in the post below.

https://forums.moneysavingexpert.com/discussion/6561558/most-tax-efficient-wage-for-single-director-owner-employee-micro-company#latest

What seems to emerge  from the above post is:

1)  By the OP's own admission the accountant is only apparently  engaged to provide accounting services. Tax advice does not appear to part of the brief, so the accountant's reticence on the questions now raised, is not entirely surprising. You get what you pay for.

2) A £60k contribution to Sipp in the year of that post, was not fully funded from retained company profits, but required a significant injection of inherited monies by way of an inward director's/shareholder's loan. So  the question OP now poses with regard to current proposal would have been more appropriate to ask with regard to that more substantial contribution and circumstances that made it possible.

3) Some what concerning, is as a result of 2) above and future intended Sipp contributions  the OP then expressed the view that he doubts the company will ever be profitable going forward, and certainly unable to declare future dividends ( so no retained profits).

In view of 2)  and 3) above,  ( assuming this has not already been done ) should the company not be prioritising repaying the director's loan which enabled  the large Sipp contribution ASAP, to demonstrate its ability to do so from profits?  

I am of the view that past and intended Sipp contributions against this  background of inadequate retained company cash, warrants consulting a corporate tax specialist to review the OPs corporate activities.  Specifically with regard to the 'wholly and exclusive' tests and case law pertaining thereto and the bearing that has  on his 'source' of pension funding. In the meantime, the OP should perhaps acquaint himself with HMRC's duality of purpose consideration when applying the test - per below 

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim37007#:~:text=The legislation disallows any expenditure,that the expenditure is disallowed.

Recycling ones own personal capital to fund corporate pension contributions more than raises a skeptical eyebrow especially if the loan is never repaid. I am surprised that was not commenting on in the earlier post.

Thanks ... that's also an interesting linked page. But also does not even begin to answer the question I asked in the post starting this thread. The exclusive purpose of this thread is to get some (hopefully informed) views on how HMRC thinks and acts in this area. Particularly bearing in mind that the 60k director's pension contribution made in 24-25 was also, in part, using up entitlement from the previous 2 years (as I have already said in this thread). 

You seem to be making some assumptions here: I have indeed been getting the company to repay large amounts of the 24-25 loan (from me) made to enable the 60k pension contribution made in 24-25: in fact it's almost been paid off. It is also wrong to suppose the company is not now making any profits: as a general matter, it appears perfectly legitimate to hope that, from now on, the company makes minimal profit (particularly after **taking allowable director pension contributions into account**, whatever "allowable" means in this context).

I think the source of the problem here is that HMRC (from what I've seen so far) deliberately chooses to couch its guidance in ambiguous terms: "a definite part or proportion of an expense has been laid out or expended wholly and exclusively for the purposes of the trade, profession or vocation." What does that even mean, when talking about a director's pension contribution, particularly when it may relate, in part, to entitlement from prior financial years? Even considering one year in isolation, if the director's salary is £9k, in what real sense can a director's pension contribution of £9k be said to be made "wholly and exclusively for the purposes of the trade, profession or vocation", any more or less than one of £18k? No director's pension contribution can EVER have such a purpose, and from the company's perspective its sole function can only ever be to reduce company tax and NI liabilities, whilst simultaneously reducing the company's assets in exchange for zero benefit for it. 

Such an expense can NEVER foster, promote, or benefit the company from the PoV of the "purposes of the trade, profession or vocation", in the way that making an investment might. Putting it another way, it is clear that every director's pension contribution has a "dual purpose"... or more accurately a blatantly obvious single purpose, which has nothing whatsoever to do with furthering the company's intrinsic interests. The only (barely) conceivable way this might make sense would be in the context of a company wishing to attract a hopefully skilled director by offering a generous salary + pensions package. But for a one-person band, NEVER.

It's just possible that there is some rational basis behind this "guidance", but I don't currently believe so. It'd therefore be most valuable to hear some empirical evidence from people who have actually had dealings with the HMRC in this area, either as an adviser or as a company director having received pension contributions.

PS I am never going to consult a paid adviser in this area: it would be strictly impossible to find such a person and be sure that they actually knew what they were talking about. They would charge far too much money. And, finally, I can be 100% sure of one thing: whatever advice they gave or views they expressed, these would be no less ambiguous than the incoherent, ambiguous blurb on the HMRC site that we're discussing.

Marcon

mrodent33 said:

Hard to understand why your accountant can't give you a straight answer, but then of course we don't have all the facts and figures.

I suspect that - happily! - you are overthinking this. HMRC aren't going to get excited if a director working in their own business has a relatively modest contribution paid to their pension by their company - so if your company has profits to support the full £18K contribution (hardly an excessive amount), that would seem the logical way to go. 

This would probably make reassuring reading for you: https://techzone.aberdeenadviser.com/public/pensions/Employer-pension-contributions, especially the section headed 'Controlling Directors'.

As you'll note, HMRC tends to get interested when contributions are made for 'Connected Parties' - which doesn't apply here.

Thanks very much, that page is precisely what I'm looking for. [incidentally, it seems I can't mark your post both "interesting" and "thanks". But I want to mark it both: how unsatisfactory ]

That's most kind of you - but having read what @Poseidon1 posted above, I think you need to take some advice. You said in the post they quoted:

'....my accountant has been a bit cagey in the past, suggesting I talk to an "independent financial adviser" about personal tax matters. That ain't happening.'

If the company doesn't have the profits to make these 'relatively recent' contributions, HMRC may well look askance if you are funding them by means of a personal loan to the company - something I hadn't known when I posted my original answer, as you will note from my reference to the company having sufficient profits to support these pension contributions. Even if your accountant isn't engaged to give you tax advice, they must have noticed the balance sheet entry in relation to the director's loan and registered the link between that and the SIPP contribution?

mrodent33

If the company doesn't have the profits to make these 'relatively recent' contributions, HMRC may well look askance if you are funding them by means of a personal loan to the company - something I hadn't known when I posted my original answer, as you will note from my reference to the company having sufficient profits to support these pension contributions. Even if your accountant isn't engaged to give you tax advice, they must have noticed the balance sheet entry in relation to the director's loan and registered the link between that and the SIPP contribution?

Yes, of course, he noticed everything. In the limited exchange I had with him on the subject, he said there is nothing wrong with directors loaning their own limited companies any amount they like, and in view of my company's turnover over the past 10 years or so £60k doesn't look hugely out of place... if indeed such considerations are important. 

Marcon

mrodent33 said:

This follows from this question ... but it really is quite a specific question which someone might be able to answer quite easily.

Say I'm the director of a limited company. This year, i.e. before end March 2026, out of company profits, I get my company to pay me a salary of £10k. I also get the company to make a director's pension contribution (to a SIPP of mine) of £10k.

Am then also entitled to make another £10k contribution to a SIPP of mine, from my own funds, as a personal pension contribution, in the same year, i.e. before end March 2026?

PS I'm asking this for the general situation where the director has no "loan situation" with the limited company. Please don't search out past posts of mine where I explain my current loan situation: I'm asking about the general case.

In general terms, there's no issue with what you are describing. Ignoring the possibility of carry forward...

Employer contributions are not limited to an employee's earnings.

Personal contributions are limited to 'relevant earnings' in the tax year in question. You'd contribute £8K to your SIPP as a personal contribution and the provider would add tax relief at the basic rate, giving you a gross  contribution equal to your earnings. If you are a higher rate taxpayer, you'd claim further tax relief from HMRC - this would not be added to your SIPP.

mybestattempt

mrodent33 said:

poseidon1 said:

The OP has not provide the whole picture with this post, there is a further back story indicated in the post below.

https://forums.moneysavingexpert.com/discussion/6561558/most-tax-efficient-wage-for-single-director-owner-employee-micro-company#latest

What seems to emerge  from the above post is:

1)  By the OP's own admission the accountant is only apparently  engaged to provide accounting services. Tax advice does not appear to part of the brief, so the accountant's reticence on the questions now raised, is not entirely surprising. You get what you pay for.

2) A £60k contribution to Sipp in the year of that post, was not fully funded from retained company profits, but required a significant injection of inherited monies by way of an inward director's/shareholder's loan. So  the question OP now poses with regard to current proposal would have been more appropriate to ask with regard to that more substantial contribution and circumstances that made it possible.

3) Some what concerning, is as a result of 2) above and future intended Sipp contributions  the OP then expressed the view that he doubts the company will ever be profitable going forward, and certainly unable to declare future dividends ( so no retained profits).

In view of 2)  and 3) above,  ( assuming this has not already been done ) should the company not be prioritising repaying the director's loan which enabled  the large Sipp contribution ASAP, to demonstrate its ability to do so from profits?  

I am of the view that past and intended Sipp contributions against this  background of inadequate retained company cash, warrants consulting a corporate tax specialist to review the OPs corporate activities.  Specifically with regard to the 'wholly and exclusive' tests and case law pertaining thereto and the bearing that has  on his 'source' of pension funding. In the meantime, the OP should perhaps acquaint himself with HMRC's duality of purpose consideration when applying the test - per below 

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim37007#:~:text=The legislation disallows any expenditure,that the expenditure is disallowed.

Recycling ones own personal capital to fund corporate pension contributions more than raises a skeptical eyebrow especially if the loan is never repaid. I am surprised that was not commenting on in the earlier post.

Thanks ... that's also an interesting linked page. But also does not even begin to answer the question I asked in the post starting this thread. The exclusive purpose of this thread is to get some (hopefully informed) views on how HMRC thinks and acts in this area. Particularly bearing in mind that the 60k director's pension contribution made in 24-25 was also, in part, using up entitlement from the previous 2 years (as I have already said in this thread). 

You seem to be making some assumptions here: I have indeed been getting the company to repay large amounts of the 24-25 loan (from me) made to enable the 60k pension contribution made in 24-25: in fact it's almost been paid off. It is also wrong to suppose the company is not now making any profits: as a general matter, it appears perfectly legitimate to hope that, from now on, the company makes minimal profit (particularly after **taking allowable director pension contributions into account**, whatever "allowable" means in this context).

I think the source of the problem here is that HMRC (from what I've seen so far) deliberately chooses to couch its guidance in ambiguous terms: "a definite part or proportion of an expense has been laid out or expended wholly and exclusively for the purposes of the trade, profession or vocation." What does that even mean, when talking about a director's pension contribution, particularly when it may relate, in part, to entitlement from prior financial years? Even considering one year in isolation, if the director's salary is £9k, in what real sense can a director's pension contribution of £9k be said to be made "wholly and exclusively for the purposes of the trade, profession or vocation", any more or less than one of £18k? No director's pension contribution can EVER have such a purpose, and from the company's perspective its sole function can only ever be to reduce company tax and NI liabilities, whilst simultaneously reducing the company's assets in exchange for zero benefit for it. 

Such an expense can NEVER foster, promote, or benefit the company from the PoV of the "purposes of the trade, profession or vocation", in the way that making an investment might. Putting it another way, it is clear that every director's pension contribution has a "dual purpose"... or more accurately a blatantly obvious single purpose, which has nothing whatsoever to do with furthering the company's intrinsic interests. The only (barely) conceivable way this might make sense would be in the context of a company wishing to attract a hopefully skilled director by offering a generous salary + pensions package. But for a one-person band, NEVER.

It's just possible that there is some rational basis behind this "guidance", but I don't currently believe so. It'd therefore be most valuable to hear some empirical evidence from people who have actually had dealings with the HMRC in this area, either as an adviser or as a company director having received pension contributions.

PS I am never going to consult a paid adviser in this area: it would be strictly impossible to find such a person and be sure that they actually knew what they were talking about. They would charge far too much money. And, finally, I can be 100% sure of one thing: whatever advice they gave or views they expressed, these would be no less ambiguous than the incoherent, ambiguous blurb on the HMRC site that we're discussing.

I take it that you have read:

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46035

Although each case depends on it's own facts it seems to me you have already concluded, for your own situation, there is no trade purpose for the pension contributions.

You ask in your first post what will happen if, on enquiry, HMRC were to disallow the deductions in the company's accounts on the basis there was a non-trade purpose and you accept that decision.

The answer is that there will be additional corporation tax to pay,  interest will be charged and HMRC might also assess penalties for making inaccurate returns.