QUESTION: I run my own company, with my husband and daughter helping me out during busy periods. I heard that the pension allowance has been done away with, can my company make pension contributions for all three of us without any restrictions?
ANSWER: What you heard relates to the lifetime allowance being done away with, it will most likely benefit individuals who already have made significant pension contributions. Previously you would have been charged if you/your employer contributed more than £1,073,100 to your pension.
Employer contributions are generally considered a great way to remunerate employees as the company can get a deduction when calculating their corporation tax liability. Also, pension contributions do not incur the 13.8% employer national insurance contributions that a salary would incur.
For the tax relief, we would be relying on the contributions being incurred wholly and exclusively for the purposes of the company’s trade, ie as part of the employee’s remuneration package. Therefore, are your husband and daughter employees of the company?
If not, you run the risk of their contributions forming part of your remuneration package, subject to both tax and 13.8% employer national insurance. Also, these third-party contributions are treated as personal contributions by the individual who would benefit, so they must have sufficient earned income in the tax year to justify the contribution.
Additionally, HMRC may seek to disallow the relief for contributions if the remuneration exceeds a reasonable level of the reward for the work undertaken by that individual on the grounds that the cost is not a genuine trade expense.
Consider each person’s whole remuneration package, is it in line what you would pay an unconnected employee for the same duties. Should the pension contributions create a loss for the company, it could be difficult to argue the contributions were wholly and exclusively incurred.
From the employee’s point of view, pension contributions are paid before tax and employee national insurance contributions, meaning that their pension pot is increasing by more than they would have received into their hands as a net salary.
From an individual point of view its important to note the annual allowance has not been done away with along with the lifetime allowance. If total contributions including employer, personal and third-party, exceed the annual allowance, the individual will incur an annual allowance tax charge.
The annual allowance for 2024/25 tax year is currently £60,000 per annum. This could be reduced to as low as £10,000 if an individual’s ‘threshold income’ exceeds £200,000 and ‘adjusted income’ exceeds £260,000. However, if you have already a pension pot in place, you may be able to utilise unused annual allowances from the previous three tax years.
To make sure planned pension contributions are getting the tax consequences you are expecting and individual’s unused annual allowances are maximised without being exceeded you should discuss with your tax advisor as well as your independent financial advisor.
- KellyAnne Murtagh (k.murtagh@fpmaab.com) is senior tax manager at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies
