SIPP TFLS under new 4/2006 rules?

You need to read the small print on the HMRC website.

Employers can put in unlimited amounts - but these are not guaranteed to get tax relief, and could be questioned by the local tax inspectors

- esp. if they are viewed as 'excessive'.

What this boils down to is:

If a contribution is made by the employee out of their own taxed income, contributions of up to 100% of salary (up to £215,000) should nearly always receive tax relief without any problem. BUT: Large Contributions made by the EMPLOYER are more likely to be questioned by the local inspectors.

The reasons given is that contributions should be made for the purpose of carrying out a trade or profession. i.e. people get pension contributions as part of their salary. It serves a purpose (i.e. keeps them loyal & happy) and therefore is a legitimate business expense for the company. However, if an employer suddenly decided to increase the level of contributions for a specific member by ten or twenty times the previous level, the revenue would query why this benefits the business. If no reason can be given, they may decide that the contributions cannot be offset in order to reduce their corporation tax liabilities, because the contribution has been made solely to benefit a specific person, not the company as a whole.

If this is done the other way - if a director suddenly hikes his salary from say £7,000 to £200,000 per annum, and decides to make a pension contribution of a similar size, the local inspector may decide that this is a purely artificial increase in order to achieve what cannot be achieved in the point above. But this is where it gets very hazy. Assuming that he pays 40% income tax on the majority of a £200K salary, there should be no particular reason why he cannot get tax relief on a similar level of pension contributions.

Put it another way - if your earnings increased by such a rate in a very short period of time, it would be no surprise if the local tax office started to look into your affairs a bit more closely - therefore, if you plan to do this, you should refer it to the local tax office for an opinion before any salary/dividend reconstruction is put into effect.

Finally, why do you assume that they will abolish the lump sum ? This is incredibily popular, and would be politically dangerous for any government to attempt this.

Do you know something that we don't ?

Rgds Neil.

Financial Calculators & Tools

Thank you for your clarification. You appear to be an expert on this, but is this actually in the regs?

Let's say the ltd co. is 100% owned by the sole director. There is only one other employee on PAYE, a low level admin person. It's normal for the Dir to pay himself what he likes, or what he can, both in this company and in similar companies everywhere. The Dir can draw a few hundred k a year, in any combination of salary and divis. Nobody questions this (I know!).

This is new. Under the old rules, so long as you drew a salary (i.e. not a dividend) the company got CT relief on it (it was a 100% business expense) plus you could make the appropriate (huge) PP contribution, and this would AFAIK NEVER be questioned. What reg gives rise to the ability to question it now?

In fact, people who had a large ex-EPP fund which was overfunded (as a result of widespread abuse of the EPP system in the 1980s, when you could put in £ for £ of salary under the de minimus rule) *had* to draw occassional unusually big salaries in order to satisfy the GN11 test so they could move their fund to a PP. Again, this was never AFAIK questioned.

A few years ago I had to hike my salary from my usual 5k (just below the LEL) to about 150k in order to pass the GN11 test and transfer my fund to a PP. This hike was never questioned. (The fact that the idiot of an IFA I used to work out the necessary salary to pass GN11 got it wrong by a factor of 10 times, causing me to waste a huge amount of NIC, is beside the point)

Why? In your own business, you can draw what you like out of it and nobody has the right to question it. What reg gives them this right? It's never been there before. I've been in business for 30 years.

No, it's just illogical. Contrary to what most punters are made to believe by the salesmen, a PP has no tax advantages over DIY investments done via ISAs (you pay the tax on the way out, or you pay the tax on the way in), unless you assume that your retirement tax rate will be lower than it is now (reasonable but far from a guaranteed assumption). The TFLS is the thing that sticks out; a tax free handout. I am sure it's safe for a few years but 10 or 20? Who can tell? The whole state pension system might get rolled up into the social security net by then....

1. Yes it is in the regs - see
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   However, the final definitive guidance has yet to be announced. I have queried this with the Revenue, and they are still waiting for this. That is why a grey area currently exists.

1. I understand that you can pay yourself what you want - either via dividends / salary, and how this would work under the old EPP rules. However, things are completely different now.

Because discretion is being handed over to the local inspectors, this could be just a licence for them to print money.

Until the final rules have been decided, and a few test cases have gone through, I would hold off trying to make a contribution of such a magnitude.

You don't want to be in situation where a contribution has been made, then a local inspector turns round and says "No. We will not allow you to offset this against profits / Corporation Tax". Once the contribution has been made, you can't get it back very easily, and in such a scenario, it may have been worthwhile making alternative investments with company cash.

That is why I recommend that you run it by the local inspector first.

Only if the contribution is made for business purposes.

Jonathan Bryce wrote

Very very hard to define that one if it's a pension contribution. How on earth do you do that? By proving the employee would have left otherwise, and is essential to your business? I had to prove the "essential" bit once for immigration purposes (for a prospective employee) and it is basically impossible.

snipped-for-privacy@invidion.co.uk wrote

Anyway, to simplify matters:

Presumably I can put (my own money) in £ for £ of my gross salary - is that correct? Previously I could put in only the "stakeholder" limit of £2800/year. My gross salary is just £4800 or so (the LEL).

That's correct. You can make a £4,800 contribution.

Well the IR accepts that you have to pay your employees if you want them to work for you, and that part of that payment package may be a pension contribution.

If the person is unrelated to you, it is unlikely that you would pay them excessive amounts of money, so generally you should be OK with whatever you pay them.

However, when it is your wife, or you, the remuneration package has to be fairly similar to what you would have to pay some unrelated person to do the job. £200k for answering the phone and maintaining the appointments diary is likely to be excessive.

Jonathan Bryce wrote

I recall the recent test case (which the Revenue won) where a man was paying his *wife* a load of dividends (she had a sizeable shareholding). The verdict appeared to be specific to married couples though - had she been just a girlfriend it would have been OK.

wrote

A bit like abolishing MIRaS? Oooops, they've already done that...