Contractor Pensions

Q. I am a contractor outside IR35 using a limited company. I am a Director and 50% shareholder. The company is also employing my wife (Company Secretary, not Director & 50% shareholder) and pay both her and me £10k p.a. Salary. The company has also paid £9k into her pension this tax year and nil into mine (as she has no historic pension to rely on). We both also take a dividend up to the higher rate tax limit.

I want the company to pay another £3k pension contribution for her. Would this cause HMRC to question/investigate the validity of the pension contribution to my wife’s pension?

Would the existing £9k contribution paid to date be seen as excessive in any event?

Would it help to pay £9k into my pension so that we are equal recipients of pension contributions (even though I would incur higher rate tax when I draw the pension and my wife will be a zero rate tax payer)? (I am the key employee in the company).

A. A pension contribution by an employer to a registered pension scheme in respect of any director or employee will be an allowable expense unless there is a non-trade purpose for the payment.

In cases where the contribution is part of a remuneration package paid wholly and exclusively for the purposes of the trade, then the contribution is an allowable expense.

Whether there is a non-trade purpose for the payment will depend upon the facts of the individual case.

One situation where all or part of a contribution may not have been paid wholly and exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer.

In this situation, HMRC will consider whether the amount of the overall remuneration package, not simply the amount of the pension contribution, was paid wholly and exclusively for the purposes of the employer’s trade.

On occasion an employer may make an increased pension contribution on the basis that a scheme is underfunded. In this case HRMC will, when comparing contributions between periods, consider the full facts, including the history of remuneration and contributions, before challenging a deduction based solely on annual comparatives.

HMRC will accept that the contributions are paid wholly and exclusively for the purposes of the trade where the remuneration package paid in respect of a director of a close company, or an employee who is a close relative or friend of the director is comparable with that paid to unconnected employees performing duties of similar value. When there are no employees with whom duties are genuinely comparable then it may be necessary to compare remuneration to similar third parties to establish whether or not it exceeds a reasonable level of the reward for the value of the work undertaken by that individual for the employer on a commercial basis. Where a relative/friend is paid significantly more than third parties doing the same work this is an indicator that there may be a non-trade purpose to the remuneration.

Where the facts show that a definite part or proportion of an expense is not wholly and exclusively incurred for the purposes of the trade, HMRC may disallow that part or proportion.

It is not possible to give advice on pension funding levels as this is investment advice.

In summary, it may well be that HMRC may wish to take a closer look at the employer contributions made on behalf of the wife but this does not mean such contributions will be ultimately disallowed.