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Pension opportunity knocks

The de minimis rules are seen by many as an easy way to fund pension benefits for low earners without contributions being restrained by those low earnings.

Of course, it was always the case (and still is) that, at some point, remuneration would have to be at an app-ropriate level to justify the benefits provided by the pension fund. This is something that would need to be considered in the lead-up to retirement.

As was widely expected, the Pension Schemes Office has, following discussions with the ABI, amended the de minimis limit for insured money- purchase schemes.

With immediate effect, the de minimis limit now looks like this: "No check against the maximum funding rate is required where the annual aggregate contributions to all schemes, excluding contributions for death in service benefits, for the same employment do not exceed 17.5 per cent of remuneration (within the permitted maximum) subject to the contributions (including special contributions) not having been at a higher amount than the figure determined from this limit in any earlier year. There is no corresponding de minimis limit for special contributions."

The effect of this change would appear to be that the option to pay 15 per cent of the earnings&#39 cap (rounded up to the nearest £1,000) as long as it does not exceed 100 per cent of salary has been removed. It is only those who have been making use of this option who will be affected.

An example of how it appears this will affect someone who up to now has been making use of this option is:

Present contribution a year: £6,000

Present salary a year: £6,000

New de minimis limit a year: £1,0While further clarification is, at the time of writing, being sought, according to the wording of the limit, it will not appear to be acceptable, at the next annual assessment, simply to reduce contributions to £1,050 a year because contributions will have been at a higher amount than this in an earlier year. A funding check will be required. Depending on the fund value, it might be that contributions would have to be reduced to below even the new de minimis limit.

As stated above, there is evidence that the de minimis rules were often considered when funding occupational scheme contributions for comparatively low-paid employees, especially spouses of business owners, directors, partners or even sole traders. In these circumstances, this change represents an opportunity to advise and if necessary restructure remuneration and pension packages for these people.

If salary increases are considered to justify maintaining contributions, careful consideration must be given to the deductibility of the salary for the payer. It is still necessary for the payment to be incurred wholly and exclusively for the purpose of the trade in order to be deductible. The Inland Revenue is likely to look closely at the duties performed in return for the salary, especially where a significant increase is made.

Sole traders wanting to ensure that more of the business profits are assessed on the spouse but who anticipate a problem regarding the deductibility of remuneration may consider taking their spouse into partnership. Of course, this immediately destroys the employer/employee relationship and would operate to prevent occupational contributions being made. Pensions for the self-employed would, of course, have to be provided through PPP contributions.

Aside from this pension impact, the Inland Revenue has been keen to look closely into husband and wife partnerships, arguing in some cases that, where the spouse&#39s main right is to income and a full contribution to the partnership activities is not being made, there has been an effective settlement by the former sole trader and that, as a result, all business income should be assessed on that person.

Another situation where the de minimis rules may have been used is where remuneration is taken substantially in the form of dividends which are, of course, non-pensionable. The de minimis rules (even in their old form) would not permit contributions if there were no salary or taxable benefits in kind at all.

This recent change to de minimis should give advisers the chance to review the remuneration structure for company directors to ensure they are aware of the full implications (both current and future) of taking funds from the company by way of salary or dividends.

The immediate financial attraction of extracting funds from a business for current expenditure by the shareholder by way of dividends (thus avoiding National Insurance) is understandably attractive, especially to taxpayers who would otherwise have been suffering employee&#39s National Insurance.

The company cashflow implications of payment by way of dividend will also be helped post-1999 when advance corporation tax is abolished and, for small companies, there is no compensatory movement to payment of the corporat ion tax liability in instalments in advance.

It is worth remembering, however, that, for companies with profits in excess of £300,000, extracting funds for higher-rate taxpayers by dividend is positively financially detrimental compared with extraction by way of salary. Of course, dividends are not pensionable.

The approach of March 31 (the company year end for many businesses) and April 5 (the tax year end) together with this latest change to de minimis rules represents a good opportunity for advisers to visit their key business clients in order to properly review pensions and remuneration strategies.

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