Is there a limit on salary increase in order to fund a pension?

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FarmFly

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We are hoping to increase my wife's salary substantially in order to increase her pension funding. She is a director of the company and a 50% shareholder. She does the accounts for the business, but her increased salary would be far and above the industry norm for the work she carries out for the company (so my accountant says).

Would this be an issue for revenue considering all income tax etc will be paid?
 
FarmFly said:
We are hoping to increase my wife's salary substantially in order to increase her pension funding. She is a director of the company and a 50% shareholder. She does the accounts for the business, but her increased salary would be far and above the industry norm for the work she carries out for the company (so my accountant says).

Would this be an issue for revenue considering all income tax etc will be paid?
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Yes, it would be. In order for an expense to be deductible for corporation tax purposes, it must be wholly and exclusively incurred for the purposes of the trade; an inflated salary isn’t. The issue is amplified when large employer pension contributions are made in respect of a bogus employee on a bogus salary. They aren’t deductible either.
 
Thanks for the reply. I would have thought that since it's our business, we have worked hard to build it up over the last 15 years, paying ourselves below the industry norm, that when we have funds built up, we can pay ourselves a decent salary.
 
FarmFly said:
Thanks for the reply. I would have thought that since it's our business, we have worked hard to build it up over the last 15 years, paying ourselves below the industry norm, that when we have funds built up, we can pay ourselves a decent salary.
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The issue is where a spouse is paid over the odds as a ‘duck and dive’ to circumvent the €2m lifetime pension threshold.
 
Given it's your own company, can you not just pay pension contribution from the company directly to your wife's pension (as an employer contribution) without increasing salary - there isn't a limit to company contributions as far as I am aware
 
EmmDee said:
Given it's your own company, can you not just pay pension contribution from the company directly to your wife's pension (as an employer contribution) without increasing salary - there isn't a limit to company contributions as far as I am aware
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There is; it’s a function of a number of variables, including the employee’s salary.
 
If you give a person more salary
They also pay more tax
Authorities won't object
And if your person has special skills
It should be possible to justify being paid more
 
EmmDee said:
Given it's your own company, can you not just pay pension contribution from the company directly to your wife's pension (as an employer contribution) without increasing salary - there isn't a limit to company contributions as far as I am aware
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Gordon Gekko said:
There is; it’s a function of a number of variables, including the employee’s salary.
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It's probably worth clarifying here that employer/company contributions to PRSAs are still subject to the same age-related limits for tax relief as personal contributions; 25% of salary while in your 40s etc. Employer/company contributions to an Occupational Pension Scheme (OPS) are not subject to these limits. As Gordon says, there's still a limit which is a function of several variables including salary, but the OPS calculation will almost always result in a far higher level of allowable employer contribution than the age-related limits. So you should make sure that you have fully explored the maximum allowable company contributions to an Occupational Pension Scheme based on current salary.
 
Hi Farmfly,

There are some earlier threads on this topic. Sorry I don’t know how to link a thread but if you search for “Calculating maximum employer contribution to Executive Pension Plans?” on AAM you’ll find some useful posts.

For some other threads try searching “max funding”.

Gordon is right, there can be issues with inflating salary just for the purposes of making pension contributions so make sure you get guidance from someone who has a good understanding of Revenue Pension rules & how this will also impact how your wife draws sown these benefits at retirement. In my experience accountants are not generally fully informed when it comes to the intricacies of pension funding.
 
Thanks for all the replies.

I'm in a situation where I'm hoping to get out in 3-4 years and I need to bulk up the pensions as part of the exit strategy. We have maximised our employer pension contributions so far, so it's really boiling down to increasing salaries to allowing lump sum funding into pensions after this.
It doesn't seem to be black and white - hence the question. Good problem to have though!!
 
When you say 3/4 years would that also be 3/4 years of normal retirement age of the scheme? If so you might be able to apply a market rate to the pension funding which would achieve what you want to do
 
Just wondering whether the OP's spouse could take additional income as Director's fees? Would this help to solve the blockage?
 
Not sure what you mean Fergal19 - basically I'm 52 and would like to sell up by 55-57. Just planning ahead, but so far none of my plans have panned out the way I thought they would! Also, elacsaplau, how do you account for "directors fees"?
 
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