Director Pension

Director paying pension causing loss

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Hello All

I have a client who is director and shareholder of a small business. She wishes to pay herself a small up to £40K pension and take a minimal salary in the year (less than £8K) which will cause a loss in the accounts for the year.  Is this going against their dir fiduciary duty to act in the best interest of the business.  I can't see any other technical reason why this couldn't go ahead? But maybe you will have some further input on this.  Personally I wouldn't want to drive a loss.  There are dist reserves bfwd to offset the loss but wipes out the option of a dividend. Many thanks if you have any experience in this area.

 

 

Replies (18)

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By johngroganjga
20th Jun 2016 17:00

If she is the sole shareholder you don't have to worry about her duty to herself. The only duty you need to think about is her duty not to put the company's creditors at risk.

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By Ian McTernan CTA
20th Jun 2016 16:22

Would need to look at whether the company can afford to pay the pension premium- although you call it a 'pension' and 'pay herself' so I'm not entirely sure what you are asking.
If she is paying herself £40k then that's salary (subject to dividends paid, director's loan account balance, etc etc)/
If the company is paying a premium in to her personal pension, then the payment may need to be justified commercially in case HMRC take a look at it.

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Replying to Ian McTernan CTA:
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By Sjsaccountant
20th Jun 2016 17:03

Quote:

Would need to look at whether the company can afford to pay the pension premium- although you call it a 'pension' and 'pay herself' so I'm not entirely sure what you are asking.
If she is paying herself £40k then that's salary (subject to dividends paid, director's loan account balance, etc etc)/
If the company is paying a premium in to her personal pension, then the payment may need to be justified commercially in case HMRC take a look at it.

The £40K is being paid into a pension straight from the company. the £8k is a small salary she takes. I agree there is a risk of the commerical justification.

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By Lship
20th Jun 2016 16:49

Might struggle passing 'the wholly and exclusively for the purposes of trade' test if questioned (especially seeing as it's creating a loss....)

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By Sjsaccountant
20th Jun 2016 17:01

Quote:

Might struggle passing 'the wholly and exclusively for the purposes of trade' test if questioned (especially seeing as it's creating a loss....)

Yes that was my thinking, as agent I shall note this potential risk. I don't think it will make a difference but will make sure this is documented.

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By jon dickinson
21st Jun 2016 13:56

Don't see any problem at all. If this payment is into say a Company SSAS the argument is strengthened by the correspondingly small salary paid in the year. Total remuneration is hardly excessive here.

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Replying to Lship:
RLI
By lionofludesch
20th Jun 2016 17:17

Quote:

Might struggle passing 'the wholly and exclusively for the purposes of trade' test if questioned (especially seeing as it's creating a loss....)

I struggle to see how this can be justified. How can HMRC say the director is being overpaid when all the profits are from her efforts and there are still, apparently, reserves, albeit apparently small?

Numbers would have been helpful.

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RLI
By lionofludesch
20th Jun 2016 17:01

Interesting - few of my clients would consider a £40k pension contribution to be "small".

But if these are the terms of her "employment", go for it. Only if the company fails to meet its liabilities would there be any possibility of consequences and - even then - I would consider the possibility remote.

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By pacta
20th Jun 2016 17:10

Doesn't seem commercial, does it? Having creditors finance a pension contribution?

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By lionofludesch
20th Jun 2016 17:18

Quote:

Doesn't seem commercial, does it? Having creditors finance a pension contribution?

They're not, are they ? The OP says there is a loss for this year but the loss is covered by previous profits.

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Worm
By TheLambtonWorm
21st Jun 2016 09:48

Driving a loss in a year isn't a dereliction of duty - Have to speculate to accumulate and all that!

Like Lion says - there are reserves available, so there's nothing underhand going on here, unless of course the owner sees the company going down the pan, and trying to milk the company before it goes pop to the detriment of the creditors.

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By Scriptic
21st Jun 2016 11:47

As reserves appear to have simply cancelled out the loss with "no option of a dividend" there is also the issue of a duty of "reasonable care, skill and diligence" - CA2006 174a It might be a good idea to discuss that with the client.

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By lionofludesch
21st Jun 2016 12:13

Quote:

As reserves appear to have simply cancelled out the loss with "no option of a dividend" there is also the issue of a duty of "reasonable care, skill and diligence" - CA2006 174a It might be a good idea to discuss that with the client.

Can the OP clarify whether the director in question is the sole director and shareholder ? It's something I inferred but it's not stated either way.

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By Montrose
21st Jun 2016 12:55

The unstated question is why a pension rather than a salary? Is the real motive to avoid Employer's NIC[which HMRC do recognise for a bona fide direct pension payment]? So then the question becomes is there a commercial justification for the level of pension proposed? I am puzzled why a salary is continuing, as that would argue that this is not a bona fide pension.

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By lionofludesch
21st Jun 2016 13:07

Quote:

The unstated question is why a pension rather than a salary? Is the real motive to avoid Employer's NIC[which HMRC do recognise for a bona fide direct pension payment]? So then the question becomes is there a commercial justification for the level of pension proposed? I am puzzled why a salary is continuing, as that would argue that this is not a bona fide pension.

Maybe she's just getting old and thinks she hasn't stuck enough under her pension mattress.

Your pension is never as much as you think it'll be .........

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By pauljohnston
22nd Jun 2016 13:17

Will the lady have sufficient net relevant earnings to cover the contribution?

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Worm
By TheLambtonWorm
22nd Jun 2016 14:26

NRE doesn't apply to company contributions.

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7om
By Tom 7000
23rd Jun 2016 14:54

looks good to me
If it was to her daughter I might say no

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