PROFIT EXTRACTION - 24.05.2007

Spouse’s pension contribution

Profit extraction

Salary. The 2007/8 tax year has just started and you’re probably already using the tax-free personal allowance to its full advantage. For example, by getting the company to pay your spouse/partner a tax and NI-free salary of, say, £5,200, either spread over the year or planning a one-off bonus just before the end of the tax year. But there is another opportunity to extract more profit from the company.

Pension. Your company can pay into an employee’s stakeholder pension plan. This means your spouse can extract a total of £10,400 (salary of £5,200 plus pension £5,200) tax-free from the company!

Tip. If you haven’t already done so set up a stakeholder pension in 2007/8 for your spouse/partner. Pay a lump sum, say, £1,300 (3/12 x £5,200) into it now to get it started, and then £433.33 per month from July 2007 to March 2008.

Justifiable figure

Recap. The basic rule the Taxman relies on is that only expenses which are wholly and exclusively for the business can be deducted from profits. He has long challenged the payment of spouse’s wages where these appear to be more than would be paid to an independent third party for the same work.

For example. If the Taxman argues that the justified package for the role and duties performed is only £6,000, then the adjustment he will seek is to disallow £4,400 out of the £10,400 salary pension package, and then say that the entire pension is excessive.

By your calculations. A total package of £10,400 works out at just over 37 hours a week at the National Minimum Wage (NMW) rate of £5.35 per hour, over 52 weeks. However, your spouse’s rate per hour might actually be higher than this.

For example. Find out the rate per hour an agency would charge to provide cover (e.g. in case of illness) for your spouse’s duties for the company. (See The next step.) Even after knocking off a percentage from this for the agency’s profit margin, you’ll end up with a rate higher than the NMW. For example, a rate of £8 an hour would justify a £10,400 package for only 25 hours work a week (£10,400/ £8 per hour = 1,300 hours).

Your response

Total package. The Taxman’s own guidance (see The next step)says that his inspectors are supposed to consider the total paid to the spouse; it’s not appropriate to deal with the pension separately.

Tip 1. How on earth can anybody say with conviction that the duties of an employee are worth £6,000 rather than £10,400? So provide the Taxman with the calculations that justify your spouse’s total package.

Tip 2. If the inspector still fails to see sense don’t let the enquiry drag on. Raise serious questions about the course the Taxman is pursuing, by making a formal request for the enquiry to be reviewed by a manager with a view to it being closed down without any tax adjustments.

The next step

For some ideas on the duties your spouse might perform for the company (TX 07.16.07a) and for the Taxman’s guidance for practitioners (TX 07.16.07b), visit http://tax.­indicator.co.uk