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

zagfles

There's no such thing as a "director's pension contribution". Presume you mean an employer's pension contribution, as the ltd company is your employer. There's no problem with that, but you need to make sure the SIPP provider is aware that it's an employer contribution so they don't claim tax relief on it. 

Yes you can also make a personal contribution (gross) up to your earnings, so you could pay in £8k which will get grossed up to £10k. 

This might change in a few years when the sal sac rules come into place, I would imagine they'll apply to company directors. 

dunstonh

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?
<snip>
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.

You are but in most cases it would not be sensible to do so.   (Personal money has already been taxed, and tax relief would be lower than the tax savings from making a personal contribution.)

mrodent33

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.

I haven't concluded that. I am close to concluding, for all appropriate purposes, that it is always impossible to argue that any pension contribution by a company to one of its employees, whether or not a director, can seriously be qualified as "wholly and exclusively for the purposes of the trade, profession or vocation". And hence that use of such an expression may either be due to illiteracy or might be due to a deliberate wish to confuse company directors seeking clarity. How can payment of a pension contribution ever, in any circumstances, be "for the purposes of trade"? The concept is nonsense (unless for the edge case I mentioned, where a company could be trying to get a director to join the company on the basis of an attractive salary + pension package).

Looking at one or two of the case law cases linked on the link on that page, the real test which has been applied appears, conversely, and quite straightforwardly, to be "is the remuneration appropriate for someone doing that kind of job?". So far I am assuming this qualification is applicable to payment of pension contributions as well as salary. 

If that understanding is the way HMRC interprets its own obfuscating blurb which passes for "guidance", so far I have no reason to conclude there has been any excessive payment. 

QrizB

mrodent33 said:

Contrary to the assertion of the author of the post prior to yours, directors do enjoy special privileges, in the sense that pension contributions are not limited by their salary but only by the £60k threshold, regardless of salary paid.

That isn't a "special privilege".

Every employee has the same privilege re. employer contributions.

A part-time minimum-wage employee could have £60k of employer pension contributions, if the employer was so inclined.

mrodent33

QrizB said:

mrodent33 said:

Contrary to the assertion of the author of the post prior to yours, directors do enjoy special privileges, in the sense that pension contributions are not limited by their salary but only by the £60k threshold, regardless of salary paid.

That isn't a "special privilege".

Every employee has the same privilege re. employer contributions.

A part-time minimum-wage employee could have £60k of employer pension contributions, if the employer was so inclined.

Ok I have to admit that you're the first person to assert that. If that is true, how could that £60k pension contribution ever be qualified as "wholly and exclusively for the purpose of trade, etc."? (with regard to that part-time minimum-wage employee).

Looking at the page someone suggested I look at, https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46035, I looked at the link to case law cases of situations where companies have fallen foul of the regs. And the conclusion I tend to be drawing is that it is when payments (particularly of salaries) in excess of the "intrinsic financial worth of the job" are made (i.e. nothing whatsoever to do with "the purposes of trade"). Is not the same test applied when considering HMRC's analysis of pension contributions? And surely the directors paying this "part-time minimum-wage employee" a 60k pension contribution would be very likely to fall foul of that. Wouldn't they?

[PS by the way, someone appears to have merged the two questions I posed, which is not in the least bit helpful, because they are on two distinctly different topics. The first question was entitled "Another question about directors' pensions and the "wholly and exclusively" thing". The second one was "Can you combine a director's pension contribution to a SIPP with a personal contribution?". What precisely was GAINED by merging these two questions, other than creating confusion?]

zagfles

mrodent33 said:

QrizB said:

mrodent33 said:

Contrary to the assertion of the author of the post prior to yours, directors do enjoy special privileges, in the sense that pension contributions are not limited by their salary but only by the £60k threshold, regardless of salary paid.

That isn't a "special privilege".

Every employee has the same privilege re. employer contributions.

A part-time minimum-wage employee could have £60k of employer pension contributions, if the employer was so inclined.

Ok I have to admit that you're the first person to assert that. If that is true, how could that £60k pension contribution ever be qualified as "wholly and exclusively for the purpose of trade, etc."? (with regard to that part-time minimum-wage employee).

Lots of people here use salary sacrifice to pay the max possible into a pension, so they could easily end up with a salary of min wage and £60k of employer pension conts.

Looking at the page someone suggested I look at, https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46035, I looked at the link to case law cases of situations where companies have fallen foul of the regs. And the conclusion I tend to be drawing is that it is when payments (particularly of salaries) in excess of the "intrinsic financial worth of the job" are made (i.e. nothing whatsoever to do with "the purposes of trade"). Is not the same test applied when considering HMRC's analysis of pension contributions? And surely the directors paying this "part-time minimum-wage employee" a 60k pension contribution would be very likely to fall foul of that. Wouldn't they?

Obviously if the going rate for the job is min wage no employer is going to pay £60k into their pension. Why would they? Nothing to do with HMRC rules. 

But someone with a job commanding a salary of say £85k could sal sac ~£60k into their pension and take ~£25k min wage. Exactly the same as someone running a one man band limited company making £85k could. There's no special advantage for company directors. 

zagfles

mrodent33 said:

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.

I haven't concluded that. I am close to concluding, for all appropriate purposes, that it is always impossible to argue that any pension contribution by a company to one of its employees, whether or not a director, can seriously be qualified as "wholly and exclusively for the purposes of the trade, profession or vocation". And hence that use of such an expression may either be due to illiteracy or might be due to a deliberate wish to confuse company directors seeking clarity. How can payment of a pension contribution ever, in any circumstances, be "for the purposes of trade"? The concept is nonsense (unless for the edge case I mentioned, where a company could be trying to get a director to join the company on the basis of an attractive salary + pension package).

Looking at one or two of the case law cases linked on the link on that page, the real test which has been applied appears, conversely, and quite straightforwardly, to be "is the remuneration appropriate for someone doing that kind of job?". So far I am assuming this qualification is applicable to payment of pension contributions as well as salary. 

If that understanding is the way HMRC interprets its own obfuscating blurb which passes for "guidance", so far I have no reason to conclude there has been any excessive payment. 

You seem to be confusing your role as employee of your ltd company with director of it. If your total remuneration package as an employee is reasonable (this includes salary, employer pension conts etc), then I can't see an issue. But this is an issue to speak to your accountant about, that's what you pay them for. 

mrodent33

You seem to be confusing your role as employee of your ltd company with director of it. If your total remuneration package as an employee is reasonable (this includes salary, employer pension conts etc), then I can't see an issue. But this is an issue to speak to your accountant about, that's what you pay them for. 

I don't think I am confusing those roles: where's your evidence?

In fact no, I don't pay my accountant for that: I pay him to produce the accounts and to submit the CT600. 

I currently don't believe most accountants understand much about the reality of HMRC's policy and its interpretation of what I believe to be its incoherent rules. There's an interesting document here from 2006 about a consultancy which witnessed the introduction, by HMRC, of the "'Pension Simplification’ or ‘A-Day’" in 2006, and also had to respond accordingly in its dealing with its clients. It's quite an eye-opener.

What's striking is that since this time, 20 years ago, HMRC has never seen fit to replace this "wholly and exclusively" expression by what I might call a more honest expression. I believe, as I've said, that in reality this test which the HMRC applies is "is a company paying someone too much for the work they do?". 

However, I'd be very happy to listen to a suitably qualified and experienced expert explain to me why I've totally misunderstood all this stuff, particularly if they were then to go on to explain the true position.

Obviously if the going rate for the job is min wage no employer is going to pay £60k into their pension. Why would they? Nothing to do with HMRC rules. 

The whole point here is that if a director was indeed intent on committing fraud, they might indeed employ their spouse (for example) who in reality did virtually nothing, and pay them minimum wage ... but also get the company to pay £60k into their SIPP. It seems curious to add a post to this thread to the effect of "why would anyone commit fraud?", when the whole point of my thread is to understand how HMRC goes about ascertaining fraud. Most of the case law cases which I've seen seem to relate to this sort of "third-party bogus job" type scenario.

dunstonh

I don't think I am confusing those roles: where's your evidence?

You are.  

The shareholding director (beneficial owner) is different to an employee.    HMRC won't blink at a beneficial owner making significant pension contributions.   The wholly and exclusively test is aimed at employees.  In particular, spouses and family members employed on paper as a cleaner or similar.   (Although now that company secretaries are no longer required, many spouses now appear as shareholding directors - although some companies have never got round to updating things.)

I currently don't believe most accountants understand much about the reality of HMRC's policy and its interpretation of what I believe to be its incoherent rules. There's an interesting document here from 2006 about a consultancy which witnessed the introduction, by HMRC, of the "'Pension Simplification’ or ‘A-Day’" in 2006, and also had to respond accordingly in its dealing with its clients. It's quite an eye-opener.

I think accountants know enough to complete their job, which is to look backwards at events that have occurred.  As they are not foward planners, then don't need to go beyond that.

What's striking is that since this time, 20 years ago, HMRC has never seen fit to replace this "wholly and exclusively" expression by what I might call a more honest expression. I believe, as I've said, that in reality this test which the HMRC applies is "is a company paying someone too much for the work they do?". 

There hasn't been a need for them do so because of natural changes that have occured making it less of an issue but still gives them space to question it if someone is trying it on.

If you have a spouse as company secretary, you would expect to pay less into a pension than a director.
If the spouse is "employed" as a cleaner, you would expect them to pay even less into a pension.
If the spouse is a shareholding director (so a beneficial owner), then they can pay the max into a pension.

mrodent33

The shareholding director (beneficial owner) is different to an employee.    HMRC won't blink at a beneficial owner making significant pension contributions.   

Now you're talking. The rest of your post is also illuminating. In fact it is QrizB, in her/his last post, who said that directors were treated exactly as other employees with regard to pension contributions, and I challenged that.

And it concords pretty much with my dominant thesis, to wit that HMRC has worded this "test of legitimacy" dishonestly, and has compounded that error by not revising the ("wholly and exclusively ... business purpose") wording over the past 20 years. It's about time they DID: in particular such wording, as I interpret your post, will almost never apply to a "one-person band" situation. 

And over the past 20 years a large proportion of people who might previously have been self-employed have switched to operating under this limited company "one-person band" structure. So it is pernicious and perversely misleading to maintain this inaccurate and dishonest expression of the applied test of legitimacy.

And the effect, if not necessarily the original intent, is to keep people in ignorance about how they can legimately avoid (not evade) tax by getting their company to make, to use your word, "significant" pension contributions.