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A retiring nature
Our client is a full-time employee who pays tax at the higher rate. He is also the sole director/shareholder of a 'one man' limited company, but as this operates only on a part-time basis, its income and the profit available as remuneration or dividends is low (less than £1,000) and has (mostly) tended to remain in the company to avoid higher rate income tax.
A retiring nature
Our client is a full-time employee who pays tax at the higher rate. He is also the sole director/shareholder of a 'one man' limited company, but as this operates only on a part-time basis, its income and the profit available as remuneration or dividends is low (less than £1,000) and has (mostly) tended to remain in the company to avoid higher rate income tax.
His employment has recently become pensionable, but he has historically been contributing £200 per month net to a personal pension scheme and £25 per month gross into a retirement annuity policy. Should I suggest that he draws a small nominal salary from his company to justify personal premiums of up to £3,600 per annum, or am I correct in thinking that the combination of his directorship and salary level prevents this? If so, do the same rules apply with regard to the premiums into the retirement annuity policy?
Finally, should I suggest that he disincorporates and continues as a sole trader - his wife's wages could reduce his taxable income (we wish to avoid unnecessary higher rate liability if possible) - and would this enable payment of the premiums to continue?
Our client is keen to maintain payment of the premiums, but obviously we wish to ensure that he does not fall foul of contribution rules.
(Query T16,162) - Rip van premium.
Section 632A(4), Taxes Act 1988 states that 'A member is eligible to make contributions at any time during a year of assessment for which he has actual net relevant earnings'. If 'Rip's' client does not join the company pension scheme, there is no problem; his earnings are relevant earnings and he can pay pension premiums up to the limit calculated by multiplying his net relevant earnings (see section 646, Taxes Act 1988) by the appropriate percentage for his age. If the client has joined the pension scheme, by drawing a nominal salary (relevant earnings) from his own company, he brings himself back within section 632A, Taxes Act 1988 and can make contributions up to the earnings limit of £3,600.
As an alternative, 'Rip' could make his personal pension scheme 'paid-up' and instead make additional voluntary contributions in respect of his pensionable employment, subject to maximum contribution levels.
The contributions to the retirement annuity policy should not be overlooked. The position here is a little complicated, but was well set out in the replies to 'The pensions maze' in Taxation, 15 November 2001 at page 177. Finally, the case of Brock v O'Connor [1997] STC (SCD) 157 may also make interesting reading. - Lefty.
The existing earnings touching the higher rate apparently cover the annual contributions amounting to £2,400, when grossed up. There should be sufficient also to cover the retirement annuity premiums each year. Presumably the 17.5 per cent relief applies. However, higher rate tax relief does enhance the benefit of premium payments. The circumstance that the client's employment has become pensionable is only significant if he becomes a participant in it. In that event, section 632A(5), Taxes Act 1988 denies the window of opportunity otherwise available to persons without actual net relevant earnings.
Section 632B, Taxes Act 1988 provides an opportunity when grossed-up employment income does not exceed £30,000. This opportunity is denied to anyone who is or has been a controlling director of a company. The existence of the client's company is thus an absolute bar, irrespective of the small numbers involved.
It should be remarked that, if net relevant earnings are insufficient to support the retirement annuity contributions, these can still be made with long-term tax-free build up, but no current tax relief.
The elimination of the company is only necessary if the £30,000 cap is likely to be relevant. It is permissible to use an earlier base year (see examples in 'Use It Or Lose It' by Geoff Everett in Taxation, 2 November 2000 at pages 124 to 126).
With the company income a marginal factor, an extended projection of earnings from 2000-01 onwards should assist decisions. - Bear.
