Many sole traders and partnerships use their spouses to assist in the support of their business oper...
Many sole traders and partnerships use their spouses to assist in the support of their business operations. Where there is a bona fide employee relationship, the spouse commonly receives remuneration that falls just below the levels on which National Insurance and income tax is payable.
Historically, this low level of earnings has severely hampered the levels of private pension provision they can independently create. Because of this restriction, the funding of an executive pension style of contract offered the business owner the greatest opportunity to pay significant contributions on which income tax relief, at their own highest rate, was available.
In recent times, however, this situation has become more restricted in its appeal because of Inland Revenue changes to the basis of calculating allowable contributions.
The introduction of funding personal pensions under the £3,600 concurrency ruling has now significantly increased the pension opportunities available. Not only can the employer make contributions to the occupational scheme at maximum levels, they can also fund a contribution of £3,600 per year to a personal pension contract.
Added together, total funding for the spouse could well exceed their actual earnings, providing opportunities for the employer to reduce personal higher rate income tax liability by a significant amount. The benefits from the personal pension have no impact on the benefits available from the occupational scheme as they are applied under the concurrency ruling.
In addition, the new transfer rules will permit the occupational scheme benefits to be eventually transferred into a personal pension without limiting the tax-free cash that would have been available under occupational pension rules.
In effect, if used correctly, it will create an additional personal pension fund for the spouse at retirement if transfer takes place under current legislation.
Many self-employed individuals have not taken advantage of this separate function in recent years because of limited tax relief. In light of recent developments, Adrian Walker, pensions communications manager at Skandia, says they should certainly do so now and take the opportunity, with the help of their adviser, to revisit this position as a means of effective retirement provision.
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