Can you explain why and what we can do about it?
This is an issue that has challenged financial advisers, accountants and companies since A-Day.
To set out the background, prior to A-Day we worked with either occupational pension or personal pension rules when looking at employer contributions. Everybody knew exactly where they stood as to how much could be contributed.
Since A-Day we have operated under principles-based legislation rather than actual rules. HM Revenue & Customs’ business income manual is used by the local inspector of taxes as a reference manual covering all business expenses and company pension contributions. It states: “Any contribution must be paid wholly and exclusively for the purposes of the trade for it to be deductible (ICTA88/S74 (1) (a) for corporation tax and ITTOIA05/S34 for income tax).”
Interpreting this during the first 12 months of the new regime has been quite tough and most financial advisers and accountants have generally followed the 100 per cent of net relevant earnings rule that applies to individual contributions.
However, HM Revenue & Customs issued new guidance on January 31, 2007 designed to alleviate and clarify some of the uncertainties although, as expected, the clarification is far from clear except in one small gem tucked away in the text of BIM46075 referring to salary sacrifice.
This states: “Salary sacrifice happens when an employee gives up the right to part of the cash remuneration due under their contract of employment. An employee may also sacrifice a one-off item such as a bonus. Usually, the sacrifice is made in return for the employer’s agreement to provide the employee with some form of non-cash benefit, such as an increased contribution by the employer to a pension scheme. An increased pension contribution by an employer resulting from a salary sacrifice arrangement of the type set out at EIM42750 onwards will be wholly and exclusively for the purposes of the trade and allowable as a deduction in arriving at the employer’s taxable profits.”
I think this is superb news for business owners, such as yourself, who may typically award yourself dividends and a low salary. The company can instead vote for increased salary and/or a bonus and, provided the exchange of paperwork between the company and yourself is correct and advance notice is given, the salary/bonus can be sacrificed for a pension contribution. Due to BIM46075, it should almost certainly be allowed.
Such a clear statement within a sea of uncertainty does make one nervous but it is there in black and white in the manual that the local inspector of taxes will follow when faced with a set of accounts from a limited company.
Beware that whatever is decided does not fall foul of minimum wage legislation.
HMRC has a network of 16 minimum wage enforcement teams around the UK which respond to complaints about non-payment, help educate employers and employees and, where necessary, take enforcement action against those who fail to pay employees what they are owed.
In August 2006, HMRC published a list of the more outlandish excuses from employers for not paying the minimum wage. The top 10 in reverse order are:10. “I only took him on as a favour.”9. “The workers cannot speak English.”8. “He is over 65 so the national minimum wage does not apply.”7. “She is on benefits. If you add those to her pay, it totals the national minimum wage.”6. “They cannot cope on their own and it is more than they would get in their own country.”5. “He is disabled.”4. “I did not think it applied to small employers.”3. “I did not think the workers were worth the national minimum wage.”2. “But she only wanted£3 an hour.”1. “He does not deserve it. He is a total waste of space.”
If such an enforcement team arrives at your door, they could potentially fine the firm for not paying the managing director as he had elected to sacrifice his whole salary/bonus in favour of an employer pension contribution.
Having jumped one hurdle to get corporation tax relief, make sure you do not lose it with a fine relating to another piece of legislation.
Yvonne Goodwin is a financial planner at Pearson Jones.